A round trip sees the dollar flat to start the week

USD

The dollar began the week on the back foot, extending Friday's losses after a surprise contraction in July retail sales, before paring the move into the North American close to leave the DXY index broadly flat in the mid-99s. Underpinning that rebound, Monday saw the 60-day US-Iran MOU expire without a deal, with President Trump saying he is not interested in an extension. Iran, meanwhile, detained a UAE-owned tanker in a tit-for-tat escalation. Oil rallied close to 3%, Treasuries sold off with 30-year yields at their highest since 2007, and equities slipped, with a risk-off tone benefitting the dollar in FX space. Today's calendar is light, with US import and export prices for July due at 13:30 BST, followed later by industrial production numbers. The bigger test, however, comes in the form of FOMC minutes tomorrow, and Friday's flash PMIs.

EUR

EURUSD climbed for a third consecutive session on Monday, briefly testing 1.16 before easing modestly later in the day. Still, the pair remains within the 1.15–1.16 range we had expected to hold absent a US-Iran breakthrough. Notably, eurozone fundamentals continue to be hampered by elevated energy costs, with yesterday's Middle East developments offering no relief on that front. Today brings the German ZEW survey at 09:00 BST, with sentiment expected to improve to around 30.0 from 26.3, aided by the Merz government's reform agenda, while ECB Chief Economist Lane also speaks. Tomorrow's final July HICP should confirm headline inflation at 2.9% with core at 2.5%, readings that ought to keep a September ECB hike from the current 2.25% deposit rate largely priced in. Friday's flash PMIs are the week's main event for euro area data watchers.

GBP

Sterling offered little to start the week, settling in the mid-1.35s against the dollar, while EURGBP was flat in the mid-0.85s, consistent with our view that the pound's gains should prove limited. Indeed, we remain biased towards sterling downside over the medium term, given fiscal risks ahead of the autumn budget and our scepticism that the BoE will ultimately deliver the tightening markets price. This morning's labour market report is the first immediate test of that thesis, offering some early validation. The UK unemployment rate remained at 4.9% in June, despite expectations for a 0.1pp fall; wage data broadly matched predictions, while the quantity measures of employment scanned as soft relative to consensus. That mix is weighing on sterling through early trading ahead of tomorrow's July CPI. We expect to see price growth accelerate back towards 3.0% on energy effects, accompanied by a fall in core inflation, that we are inclined to place more weight on, with risks skewed toward a set of prints modestly softer than expected. That, in our view, continues to tilt the balance of sterling outcomes to the downside in the coming days.

CAD

The loonie was one of Monday's G10 outperformers after July CPI printed at 3.0% YoY, a tenth above both our and consensus expectations of 2.9%, with USDCAD finishing the session little changed. That said, and as we argued in yesterday's reaction note, headline strength was driven largely by temporary factors: gasoline prices rose sharply on the resurgence in global oil prices tied to Middle East hostilities, alongside World Cup-related airfare spikes, while inflation ex-gasoline held at just 2.2% for a third month and core-trim and core-median sat at 1.9% and 2.0%. We therefore retain our base case that the BoC delivers no hikes in 2026, even if risks have risen modestly, with markets now pricing around a 70% chance of a hike by December, up from roughly 60% to start the week. Today's domestic calendar is empty, leaving the loonie trading on oil headlines and tomorrow's deadline for threatened US tariffs. A durable deal could see USDCAD extend towards 1.37; escalation risks a move back above 1.40 over the coming days.

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