The dollar gains again on rising Middle East tensions

USD

The dollar closed Monday firmer against every G10 currency, with the DXY index back above 101 by the close of play, though the session was choppy. Early buck strength faded through the London morning before President Trump's announcement that the US would reinstate a blockade on Iranian shipping, alongside a 20% levy on cargo transiting the Strait of Hormuz, reignited a haven bid. Brent rose roughly 10%, breaking above $80 per barrel, while 10-year Treasury yields ground up towards 4.6%, and Governor Waller hinted that hot core inflation readings this week could prompt near-term tightening, all to the benefit of the dollar. Overnight, the US launched a third consecutive night of strikes across Iran, keeping that risk premium intact this morning. Middle East developments aside, June CPI, due 13:30 BST, is the other key domestic event to watch today. Consensus sees headline prices falling -0.1% MoM, dragging the annual rate from 4.2% to 3.8%, with core expected to land little changed from the 2.9% print seen for May. As we have flagged previously, this moderation reflects June's oil slump and predates the re-escalation, which is likely to limit any dovish dollar implications. Rounding out the day, Chair Warsh's first congressional testimony follows at 15:00 BST, though given his prior reluctance to share any forward guidance, we are inclined to attach minimal FX risk on this occasion.

EUR

The euro briefly firmed through early on Monday as the dollar handed back its Asian gains but faded alongside surging crude to end softer around the 1.14 handle, consistent with our view last week that EURUSD gains should be capped while Hormuz disruption persists. The bloc's energy import bill remains the transmission channel: eurozone yields rose as oil climbed, and the renewed supply shock should keep Governing Council hawks in the ascendancy, with markets pricing roughly 45bp of further ECB tightening this year on top of June's hike. While we think July is likely too early for another rate increase, a sustained Hormuz closure puts a September move squarely on the table. Today's calendar is thin, with French markets shut for Bastille Day, leaving German wholesale price data as the highlight. Thereafter, US CPI and Warsh set the direction into Thursday's ECB quiet period, posing modest upside risk for EURUSD if US inflation readings show a decisive slowdown.

GBP

Sterling slipped back toward the mid-1.33s on Monday, underperforming the euro too as surging energy prices weighed, though the pound retains most of last week's advance after touching a three-week high against the dollar on Friday. Today, politics dominates from a UK perspective. Governor Bailey testifies to Parliament on financial stability this morning before tonight's Mansion House dinner, where the Chancellor delivers what is likely her final address, with Reeves not expected to be retained by an incoming Burnham administration. On that point, Labour leadership nominations close Thursday, meaning Andy Burnham will be confirmed as the new party head on Friday, 17th, and then PM shortly after, likely on Monday, 20th. Any fiscal signalling, therefore, matters, while Bailey's read on the renewed energy shock will help shape August Bank Rate expectations. We see both factors skewing risks to the downside for sterling at the margin, albeit the pound will continue to be buffeted by external conditions.

CAD

The loonie largely held its ground against the dollar on Monday, supported by crude's rally even as broad greenback strength capped the move. That extends Friday's outperformance, when June jobs data showed the economy added 18k jobs versus a 10k consensus, and unemployment fell to 6.5%, lifting the loonie to a three-week high. Consistent with our view that the reaction to jobs would be asymmetric, the upside proved contained. The domestic calendar is empty today, leaving USDCAD hostage to US CPI and Warsh, before attention turns to tomorrow's Bank of Canada decision. We expect a sixth consecutive hold at 2.25% alongside a fresh MPR: Friday's mild beat is unlikely to sway policymakers, and Governor Macklem must weigh the oil-driven inflation impulse against still-soft growth. With markets assigning roughly 60% odds to a hike this year, a hawkish hold is the risk; failing that, a dip towards 1.41 looks likely to us.

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