The dollar slips as the US pauses Iran strikes

USD

The dollar stabilised on Friday after a solid week of gains, albeit accompanied by a dip in oil as hints of US-Iran negotiation progress emerged. The real story broke over the weekend, however, with the US seemingly ceasing its attacks and Iran also pausing for as long as Washington holds off, while talks on safe Hormuz shipping showed some signs of further progress. That leaves Brent trading around $90 this morning, and the DXY is down 0.25% at 101.2. With the Fed in blackout before Wednesday's unusually unpredictable decision, where markets price a 36% chance of a hike, focus today falls on June durable goods orders, seen rebounding 1.6%, and Netanyahu's arrival in Washington ahead of tomorrow's White House meeting.

EUR

Friday's flash PMIs confounded the contraction we had pencilled in, seeing the composite jump to 51.9. Even so, EURUSD closed below 1.14, recording a sixth decline in seven sessions. While that is somewhat surprising at first glance given events in the Middle East, it does tally with economic surprise indicators, which have continued to climb despite the re-escalating tensions between the US and Iran over recent weeks. This morning, we think the readthrough is clearer. A pause in fighting and tumbling oil prices have pushed the single currency back to the 1.14 mark. Today brings Germany's July Ifo, which should also show signs of improvement, if last week’s data are anything to go by. The bigger tests are Thursday's Q2 GDP and Friday's flash CPI, June having printed 2.8% headline and 2.4% core. We still see rallies capped unless the truce proves durable.

GBP

Sterling ended last week on a steadier footing. Friday's bumper June retail sales, up 1.0% against consensus for a 0.3% fall as the heatwave and World Cup lifted spending, plus a 52.1 composite PMI, helped cable stabilise above 1.33. Still, a fiscal premium attached to Prime Minister Burnham's flexibility rhetoric kept 10-year gilt yields above 5%, the highest in the G7. This morning, cable trades firmer, aided by the softer dollar and cheaper oil, while the day's domestic calendar is bare, leaving Thursday's MPC decision in focus. We expect Bank Rate to be held at 3.75%, with markets pricing just a 4% chance of a hike but a full move by November. The vote split and the forecasts' treatment of the oil shock matter most; we retain a modest downside bias pending Budget detail.

CAD

The loonie extended its quiet resilience on Friday, USDCAD closing little changed sub-1.41 as sliding crude offset the benefit of a retreating dollar. That said, it is the former dynamic that is in charge so far this morning, with the loonie marginally softer through early trading as Brent continues to slide. With the domestic calendar empty until Friday's May GDP, we continue to see USDCAD holding near current levels. UISMCA negotiation headlines and Middle East developments remain the likely near-term catalysts.

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