A round trip for the dollar as oil slides again
The dollar rebounded as oil prices fell, lifting the DXY to a one-month high. Markets are focused on the Fed decision, while EUR, GBP and CAD remain driven by policy expectations and energy markets.
USD
The suspension of US strikes on Iran, in place since late Friday with Tehran holding fire for as long as Washington does, initially extended the dollar's slide yesterday before the move reversed sharply through the US session. June durable goods orders rose just 0.3%, well short of the 1.8% rebound traders had looked for. But with front-end Treasury yields barely retreating despite crude's collapse and an AI-led rout in chipmakers dragging Wall Street off its highs, the greenback closed net higher against most majors. The DXY sits at a one-month high of 101.5 this morning, with markets pricing a 35% chance of a hike tomorrow – an unusually uncertain decision given Chair Warsh's reluctance to offer any forward guidance. We remain of the view that no change in rates is likely through the rest of the year, and a hold tomorrow would help validate that call, posing downside risks to the dollar in the short term, with only second-tier data releases on deck ahead of Thursday’s Q2 GDP.
EUR
The euro's early Monday rally proved short-lived. Having regained the 1.14 handle in early trade, EURUSD surrendered the entire advance as the dollar rebounded, settling in the mid-1.13s this morning, pinned near the floor of its range since late June. That is despite July's Ifo beating expectations at 86.6, extending Friday's flash PMI surprise. Today's calendar is light, leaving direction to Fed positioning and Gulf headlines before Thursday's Q2 GDP and German CPI, and Friday's flash eurozone inflation print, June having shown 2.8% headline and 2.4% core. We continue to see rallies capped unless the truce proves durable.
GBP
Sterling was among the weakest majors yesterday, early gains evaporating as the dollar recovered to leave cable sub-1.33 this morning, in keeping with our view that a greater fiscal premium should be attached to Prime Minister Burnham, despite pledges of discipline. Admittedly, overnight brought better inflation news: BRC shop prices rose just 0.9% in July, the smallest increase since December 2025, as World Cup promotions discounted food and drink. Still, that is unlikely to change much for the BoE, with Thursday's MPC the major UK event this week. We expect Bank Rate to remain at 3.75%, with markets pricing a negligible chance of a hike. A full move by November remains embedded in swaps, however - an outcome that looks overly hawkish in our eyes. We expect pushback from Governor Bailey, which, if realised, should pose a headwind to sterling alongside political developments.
CAD
Crude, alongside the broad dollar, drove the loonie yesterday. With Brent chalking up its largest one-day fall in more than three months, USDCAD closed 0.2% higher. Looking ahead, the domestic calendar is empty until Wednesday’s Summary of BoC deliberations, and as such, we continue to see USDCAD holding near current levels as a baseline. This call remains subject to Middle East and oil risks, especially with President Trump hosting Israeli PM Netanyahu today. But assuming no fireworks in the aftermath of that meeting, monetary policy differentials could turn more favourable for the loonie later in the week, with greater scope for markets to pare back Fed easing bets, given current rate hike pricing.