FX in a holding pattern ahead of US CPI

USD

The dollar spent Tuesday in a holding pattern, seeing the DXY index little changed just below the 100 handle that has prevailed since last Friday's payrolls report. Price action was again dominated by Middle East headlines, with reports of progress in US–Iran negotiations contradicted by Tehran's insistence that the Strait of Hormuz would remain shut until its demands are met, sending Brent and Treasury yields modestly higher. That provides the backdrop for today's July CPI report at 13:30 BST, in what is likely to be the week’s main event. Consensus looks for headline inflation of 0.1% MoM and 3.4% YoY, with core at 0.2% and 2.5%, after June's energy-led -0.4% decline. An in-line print would, in our view, favour no change in rates by the FOMC in September. And given current market pricing, which projects the decision as a coin toss, such an outcome would suggest that the path of least resistance for the dollar skews downward, provided a Middle East resolution is forthcoming.

EUR

The euro was becalmed on Tuesday, caught between two opposing forces: a softer dollar backdrop following the weak US jobs report, and the deterioration in the eurozone's terms of trade as the renewed closure of the Strait of Hormuz keeps energy import costs elevated. With the domestic calendar largely bare, yesterday's modest ranges were unsurprising, and the euro's early-August recovery continues to look more dollar-driven than a reflection of improving eurozone fundamentals. Today brings only final national inflation readings this morning, leaving the pair hostage to the US CPI print this afternoon. We continue to see consolidation in the 1.15–1.16 band as the most likely near-term outcome, absent a signed US–Iran deal that credibly reopens the Strait.

GBP

Sterling was also little changed yesterday, with cable clinging to the 1.35 handle and GBPEUR holding around 1.17, keeping the pound close to its strongest levels of 2026 on both major crosses. Notably, the currency shrugged off a soft set of BRC retail sales figures, outperforming the downside bias we held earlier in the summer, when an expected end to PM Starmer's premiership put domestic political risk front of mind — a theme we think remains a slow-burning drag rather than a spent force. Today's UK calendar is empty, leaving the pound to trade off this afternoon’s US CPI release and broader risk appetite, with tomorrow’s first estimate of Q2 GDP the next domestic test.

CAD

USDCAD slipped to a fresh two-month low on Tuesday following Iran's confirmation that the Strait of Hormuz will stay closed. With the domestic calendar empty today and the Bank of Canada not due to decide on policy until next month, the loonie should again take direction from external sources, namely this afternoon's US CPI print and the flow of headlines out of the Oman-mediated talks. A hot US inflation reading is the main upside for the pair, though we suspect any dollar rally would be partially cushioned for the loonie by the same oil-price channel driving inflation fears. Downside looks more likely, however, though a move below 1.39 feels a stretch without a durable Middle East peace deal.

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