Iran escalation keeps the dollar supported ahead of next week’s CPI

USD

The dollar remains supported in early European trade, with safe-haven demand still intact after a second round of US strikes on Iran overnight. Wednesday had been a session of two competing forces. The greenback initially rallied after President Trump declared the US-Iran ceasefire over, following fresh airstrikes and the revocation of Iran’s oil-export waiver. The move faded later in the session, however, as the FOMC minutes offered little fresh direction. Nine of eighteen participants pencilled in a 2026 rate increase at the June meeting, but the broader tone was one of data dependence rather than urgency. That kept the Bloomberg Dollar Spot Index broadly unchanged on the day. For now, the dollar is consolidating rather than extending. The next major catalyst is next week’s US CPI print. A stronger-than-expected release would quickly revive the Fed tightening narrative and could pull market pricing for the next move forward again, giving the dollar fresh upside momentum.

EUR

EURUSD remains under pressure, even after a modest overnight recovery. The pair spent Wednesday in a narrow range, unable to challenge its 21-day moving average and still trading with a fragile technical profile. The weekly Ichimoku signal and Tuesday’s daily Doji both keep the bias tilted lower, while large option expiries continue to act as near-term anchors. The fundamental backdrop also remains unfavourable. The renewed oil shock is a clear negative for the euro area's terms of trade and complicates the ECB’s policy outlook by raising headline inflation risk while weighing on growth. Nagel’s comment that, after the latest news from Iran, the ECB is “back where we began” captures the dilemma well. Today’s ECB June minutes are the main domestic event, but we do not expect them to provide a meaningful upside catalyst. The central bank is likely to remain cautious, meeting by meeting. With energy prices elevated and the dollar still supported, the risks to EURUSD remain skewed to the downside.

GBP

Sterling remains the most resilient of the major European currencies. Cable came under pressure on Wednesday as geopolitical risk and the broader European bond sell-off weighed on sentiment, briefly touching its weakest level since 2 July. The pound recovered through the session, however, and continues to outperform the euro on the crosses. The key point is that the oil shock is reinforcing, rather than undermining, the Bank of England tightening story. UK two-year gilt yields rose to their highest level in more than two weeks, while swaps now price an almost fully implied Bank of England rate increase by December. That matters because the UK inflation problem remains more persistent than in the US or the euro area. CPI fixing swaps still point to elevated inflation lasting well into 2027, limiting the disinflationary relief that peers may receive from earlier energy base effects. This keeps EURGBP under pressure and leaves sterling relatively well supported. Next week’s UK CPI release is the key domestic risk event.

CAD

The Canadian dollar is receiving modest support from higher oil prices, with Brent approaching the $80 mark as Middle East tensions keep the energy risk premium elevated. That makes CAD a clear relative beneficiary of the current geopolitical shock. Unlike most G10 peers, Canada gains directly from stronger energy prices, while the latest trade data also underline the point: the trade surplus widened to its largest level since May 2022 as energy and metals exports benefited from global supply gaps linked to Hormuz disruption. This keeps USDCAD under some downward pressure. The offset is that the Bank of Canada remains cautious against a weaker domestic growth backdrop, while the US-Canada rate spread still favours the dollar. That limits the scale of CAD upside for now. A sustained Brent move above $80 would be the clearest trigger for a more meaningful loonie recovery. Without that, USDCAD is likely to remain in consolidation mode ahead of next week’s US CPI and further Middle East headlines.

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