The dollar drops with US-Iran talks still deadlocked
The dollar falls as softer US data weighs on rate hike expectations, though ongoing uncertainty around US‑Iran negotiations continues to shape FX market sentiment.
USD
The dollar ended last week on the back foot, with the DXY slipping into the mid-99s, its weakest since late May, after another round of soft US data. July retail sales unexpectedly contracted by -0.6% MoM against expectations for a modest rise, while the University of Michigan's preliminary August sentiment index tumbled from 55.2 to 51.0, even as one-year inflation expectations edged up to 4.3%. All told, markets now price a sub-30% chance of a September Fed hike, down from above 50% ahead of last Wednesday's CPI release. Direction of travel is consistent with our view that Fed hikes this year are unlikely, and that markets remain overly hawkish, posing a medium-term dollar risk. More immediately, however, today's calendar is quiet, which should leave geopolitics in the driver's seat. An interim US-Iran ceasefire is due to expire with talks still deadlocked, which should keep a residual haven bid under the greenback, absent any breakthrough. Wednesday's FOMC minutes are the domestic highlight in the week ahead, though they largely predate the recent data run, and should read as stale ahead of Chair Warsh's first Jackson Hole address next week.
EUR
The euro capitalised on Friday's dollar slide, climbing around a third of a percent to threaten 1.16 against the dollar this morning. That now places EURUSD at the top of the range 1.15-1.16 we have flagged in recent weeks as likely to hold absent a concrete US-Iran agreement that reopens the Strait of Hormuz. Indeed, domestic fundamentals remain quietly supportive, with Q2 growth of 0.4% the strongest since early 2025, even as June industrial production stagnated under the weight of energy costs in a reminder that the bloc's terms of trade remain hostage to events in the Middle East. With the present ceasefire expiring today, we think headline risk cuts both ways for the single currency. Renewed escalation would likely hit the euro hardest among majors, while signs that Iran and the US are edging towards an arrangement on managing the strait should be a clear positive, if realised. Middle East risks aside, the domestic calendar is light, with Friday’s flash PMIs the highlight.
GBP
Sterling rode Friday's improvement in risk sentiment and the softer dollar, with cable rising into the mid-1.35s, though it made little headway against the euro. We think domestic politics should continue to weigh on the currency given fiscal risks ahead of the autumn budget, which, combined with our scepticism regarding BoE rate hikes, keeps us biased towards sterling downside. This week offers some data to test that view. Tomorrow brings the June labour market report, where unemployment is seen at 4.8%, accompanied by private-sector wage growth slowing towards 2.8%. That is followed by Wednesday's July CPI, where the Ofgem price cap reset should lift headline inflation to around 2.9% YoY, even as core eases to 2.5%, while retail sales and flash PMIs round out the week on Friday. But for today, with nothing on the calendar, cable should track the dollar and Middle East headlines, where any escalation following the ceasefire expiry would likely see the pound underperform given its risk-sensitivity.
CAD
The loonie firmed on Friday, seeing USDCAD fall below 1.39 as unwinding Fed tightening bets outweighed a softer crude complex. This morning, Brent trades near $88.50, holding a geopolitical risk premium as the US-Iran ceasefire expires with Hormuz negotiations deadlocked, though reports that Middle Eastern producers are covertly moving millions of barrels through the waterway continue to cap the upside. The domestic focus today is July CPI, a release critical for assessing the Bank of Canada's hiking prospects this year. Consensus looks for headline inflation of 2.9% YoY, reflecting energy-driven headline pressure, but with core measures contained just below 2%. Although not our base case, a hot core print could revive bets on a move at September's BoC meeting and extend CAD's gains. Beyond today, Wednesday's US tariff deadline is the other key risk to watch.