Middle East escalation keeps the dollar bid

USD

The dollar slipped to a one-week low on Friday before steadying, with the DXY closing little changed around 100.9 as oil retreated and continued US-Iran diplomacy sapped the haven bid. That calm has not survived the weekend, however. After Iranian forces attacked a container ship transiting Hormuz on Saturday, US forces struck around 140 targets overnight before launching a further wave on Sunday evening, while Iran fired on US assets across Jordan, Kuwait, Bahrain, Qatar, and Oman. Iran has declared the Strait closed "until further notice", and transits have slowed to a trickle, leaving Brent trading near $79 this morning. All told, then, the dollar opens the week firmer across the board. With little of note on the docket for today, headlines will likely dominate ahead of tomorrow's CPI. Consensus sees headline prices falling around -0.1% MoM on lower gasoline, with monthly core near 0.2%, landing just 90 minutes before Warsh's House testimony, keeping dollar risks skewed higher in the coming days.

EUR

EURUSD has slipped below 1.14 through this morning’s early trading, within sight of June's one-year lows. Stournaras' Friday comment that the ECB is "back to square one" on inflation echoed Nagel's earlier assessment and captures the Governing Council's dilemma: a renewed oil spike lifts headline inflation while damaging the eurozone's terms of trade and growth outlook, a stagflationary dynamic that is hardly euro-positive. Moreover, with little top-tier euro-area data today, energy headlines and the final ECB commentary before the pre-meeting quiet period should continue to set the tone, meaning EURUSD will likely continue to struggle, with risks skewed lower while the Strait remains shut.

GBP

Sterling remained resilient on Friday, with cable holding above 1.34, supported by leadership-transition optimism and BoE tightening expectations, while briefly printing fresh one-year highs against the euro. The pound continues to draw support from the unwind of political risk, with sterling up over 2% from late-June's seven-month low struck after PM Starmer's resignation, though we remain sceptical regarding the longevity of this honeymoon period. Meanwhile, the UK's heavy energy-import reliance leaves sterling sensitive to the weekend's Middle East escalation. Accordingly, cable is marginally softer this morning on the back of overnight dollar gains, with little else of note in the domestic calendar ahead of Thursday’s GDP numbers.

CAD

The loonie firmed on Friday, helped by June labour market figures. Employment rose 18.2k against consensus near 10k, and unemployment fell to 6.5%, below the 6.6% expected. The weekend was more of a mixed blessing, however, seeing renewed Hormuz disruption that should bolster Canada's terms of trade, but also broad dollar strength offsets. Still, Wednesday's Bank of Canada decision is the week's key event. We, like consensus, expect a hold at 2.25%, after the Bank flagged two-sided risks in June with core inflation near target despite the energy surge. Focus falls on how the MPR weighs the oil shock against USMCA-review uncertainty. Absent a sustained Brent move above $80, we expect consolidation in the low 1.41s-1.42 into the meeting.

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