The buck consolidates as oil slips back
The US dollar consolidated near six-week lows as oil prices fell on Hormuz reopening hopes. The euro edged higher, while sterling steadied and the Canadian dollar weakened despite strong domestic data.
USD
The greenback consolidated on Tuesday, with the DXY index little changed just below the 100-mark, near six-week lows. With Washington and Tokyo standing back after last week's joint yen-buying operations, USDJPY initially drifted higher for a second session as traders probed officials' resolve, before Secretary Bessent's pledge of "whatever it takes" saw the pair settle in the mid 157s overnight. A nod to BoJ normalisation also firmed expectations of a September hike from Japanese officials, consistent with our view that intervention alone cannot sustain yen strength without a macro catalyst. Elsewhere, Qatar confirmed mediators were making progress, and Bessent floated a Hormuz deal within days, sending Brent below $80 for the first time since mid-July, even as a fresh strike on a bulk carrier near the strait showed hostilities continue. ADP and ISM services headline today ahead of Friday's payrolls, though we expect Gulf and intervention headlines to stay in charge.
EUR
The euro ground modestly higher on Tuesday to trade in the mid-1.15s this morning, around its best levels since mid-June. A light calendar left the euro taking direction from oil and Middle East headlines, and both proved supportive on this occasion. Lower crude prices help blunt any war-driven inflation impulse, even as growth prospects improve. Granted, cheaper energy trims the urgency for the Governing Council's hawks at the margin, but a September hike remains the market's central case, consistent with our own call. Today's final services and composite PMIs should confirm flash readings, pointing to renewed growth at the start of Q3. Meanwhile, we continue to flag the Treasury's unusual euro-funded yen purchases as a downside risk for the single currency if repeated, and, with Tehran denying that talks with Washington are already underway, we maintain that a confirmed ceasefire is needed for euro rallies to extend from here.
GBP
With another empty domestic docket, the pound steadied on Tuesday, awaiting further Middle East clarity. That dynamic is unlikely to see meaningful challenge today either, with the final July services PMI at 09:30 BST the domestic highlight. A flash reading of 51.8 marked a three-month high, flattered by weather and World Cup-related hospitality demand. But Monday's sharp downward revision to the manufacturing print warns of similar risks later this morning. A services downgrade would reinforce our view that soft activity will keep Bank Rate at 3.75% through year-end, a persistent sterling headwind, albeit not an immediate catalyst, leaving the dollar, oil and intervention risk in the driving seat once again if accurate.
CAD
The loonie once again proved unable to bank good news on Tuesday. July's manufacturing PMI rose to 53.5, the strongest since June 2022, while June trade data showed a fourth consecutive surplus, as a jump in gold exports offset a price-led 10% drop in energy shipments. Even so, USDCAD climbed 0.2%, a fourth consecutive gain as crude slumped over 5% intraday on Hormuz reopening hopes. Today's domestic calendar is quiet, leaving the pair to trade off crude, Gulf headlines and this afternoon's US data, before attention turns to Friday's jobs report, landing alongside US payrolls. Medium term, we still look for loonie appreciation, but we remain of the view that a sustained break below 1.40 requires calmer geopolitics and concrete CUSMA review progress.