The dollar softens on peace deal news

USD

Last week saw the dollar caught between solid domestic data and Middle East tensions, leaving the DXY index just shy of 100 as Friday trading came to a close. That said, events over the weekend may have resolved that tension in favour of greenback downside: US and Iranian officials confirmed on Sunday an MoU to end the war, lift the blockade and reopen the Strait of Hormuz, with signing slated for Friday, 19th. Brent has duly slumped around 4.7% to roughly $83, a three-month low, and the DXY has slipped to the mid-99s as of writing this morning. We would still caution that this remains a deal to do a deal, however, keeping plenty of risk on the table. Middle East developments aside, attention now turns to Wednesday's FOMC, Warsh's first: a hold at 3.50–3.75% is near-certain, so the dot plot, the projections, and any explicit tilt away from an easing bias are what matter. Meanwhile, a raft of central bank decisions outside the US, and a potential defenestration of the UK Prime Minister, ensure plenty of FX catalysts in the week ahead.

EUR

The single currency spent last week at the mercy of external forces. As we anticipated, the ECB's 25bp hike to a 2.25% deposit rate was itself a non-event, but the message that the Council will not simply look through the energy shock mattered. New projections pencil in 3.0% average inflation this year against growth cut to just 0.8%, and post-meeting sources stories left the odds of a July follow-up genuinely two-sided. EURUSD rose to the mid-1.15s into Friday's close, while the weekend peace breakthrough has lifted it around 0.5% to above 1.16 this morning. Unlike other parts of the world, the domestic calendar is light this week, leaving the Fed, Friday's signing, and the G7 as the swing factors. As we have argued, soft growth caps how far the ECB, and the euro, can ultimately run, leaving the dollar in the driving seat.

GBP

Sterling remains a passenger to the dollar's swings, but with a heavy domestic overlay. Cable has edged into the mid-1.34s this morning as the Iran breakthrough saps haven demand. As we noted on Friday, resilience still surprises us: the data confirmed the economy shrank 0.1% in April, its first monthly contraction since August and an early read on the energy-price damage from the war, yet the pound has shrugged it off. The week ahead is where our caution bites. Thursday is pivotal: we expect the BoE to hold, looking comparatively dovish beside a hiking ECB, even as markets cling to one hike by year-end, and the decision coincides with the Makerfield by-election. As we warned in our Week Ahead note, an Andy Burnham victory could trigger a leadership challenge and spell the end of Keir Starmer's premiership. We continue to think an additional political risk premium belongs in sterling, and that could come later this week.

CAD

The loonie endured a volatile end to last week: USDCAD briefly broke above 1.40 on Thursday before easing to the high-1.39s on Friday, and it is holding there again this morning, caught in a tug-of-war. The collapse in oil strips away Canada's terms-of-trade support, leaving the loonie a notable laggard in this morning's risk rally, with the offsetting impulse from the Iran deal and a broadly soft dollar only enough to pin USDCAD rather than drive it lower. With last week's BoC hold at 2.25% behind us, Governor Macklem having framed weak growth alongside rising inflation as a genuine policy dilemma, and the next decision not until 15 July, the domestic calendar offers little. External forces stay in charge. As we argued, the risk channel should dominate near term now that a deal is being signed, capping the pair. But, with a hawkish Fed still priced into Wednesday, loonie rallies should prove limited, and we would not rule out a renewed test of 1.40 should the settlement stumble before Friday's signing.

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