The dollar slips despite escalating Middle East concerns

USD

The dollar's advance stalled on Wednesday, with the greenback ending the day mixed and notably softer against the euro and the loonie, despite 10-year Treasury yields printing fresh multi-month highs near 4.66% as an eleventh consecutive night of US-Iran strikes drove WTI to a six-week high near $90 per barrel. That the buck could not rally alongside oil and yields chimes with the argument we made in Friday's Week Ahead: markets look more comfortable with the risks from disrupted energy supply than earlier in the year, and with US growth set to cool, we still think a modest dollar slide looks fair. Overnight developments add a twist, however. Houthi attacks on two Saudi tankers in the Red Sea add further supply chain concerns, while disappointing Alphabet and Tesla results pose a challenge to the AI optimism underpinning US equities, and the dollar at the margin. With the Fed in blackout before the July 29th decision and only jobless claims due, with consensus at 214k, the dollar should trade off crude, tech fallout, and this afternoon's ECB.

EUR

Wednesday saw the euro grind out a second successive, albeit modest, daily gain. That said, this is still resilience worth noting given Brent's relentless climb. Looking ahead, attention now turns squarely to today's ECB decision at 13:15 BST. As we wrote yesterday, we think this meeting comes too early for another move after June's hike took the deposit rate to 2.25%, a view shared by markets that price a 95% chance of a hold. The interest instead lies in President Lagarde's press conference half an hour later, and specifically whether she keeps a September hike alive. A sustained closure of the Strait of Hormuz argues that she should, as does last week's stellar ZEW print, though June inflation easing to 2.8% from 3.2% cuts the other way. A hawkish emphasis on energy-driven upside is the more likely outcome in our view, given recent geopolitical events, suggesting modest upside risk for EURUSD today, even if prospects further out look somewhat more mixed.

GBP

Yesterday's June CPI report delivered the downside headline surprise we had flagged, with inflation slowing from 2.8% YoY to 2.6%, below the 2.7% consensus and the softest print since March 2025. As we argued in yesterday's reaction note, however, the release warrants caution. Core inflation held at 2.6%, and services eased only to 3.6%, both a touch above expectations, while the energy-led drop largely reflects prices collected in mid-June, during the short-lived truce that saw the Strait of Hormuz reopen. With that ceasefire having collapsed on July 8th, Brent now near $96, and Ofgem's price cap rising this month, headline inflation should snap back in July. Cable duly dipped only briefly, before steadying just below the 1.34 handle, where it continues to trade this morning. With the calendar quiet until tomorrow's retail sales and flash PMIs, politics remains the pound's swing factor, and we retain a modest downside bias pending detail on the Burnham government's fiscal plans.

CAD

The loonie extended its recovery on Wednesday, with USDCAD slipping below 1.41 as rallying crude underpinned the currency. Having jumped on Monday's announcement of 50% tariffs on nearly $20bn of Canadian goods, USDCAD has retraced as Prime Minister Carney and President Trump agreed to intensify negotiations, and as war-driven supply fears lifted WTI. That loonie performance is all the more impressive given Monday's soft CPI report, which as we argued, should kill off BoC hiking bets entirely. But overnight attacks on Saudi tankers have kept oil bid, leaving USDCAD on the defensive. Today brings May retail sales, where consensus looks for growth of 1.0% on the month. Even a solid print is unlikely to move a Bank of Canada that held at 2.25% for a sixth time on July 15th, so the loonie should keep trading off oil, risk appetite, and trade headlines. We continue to expect USDCAD to hold near current levels, with closing rate differentials favouring a grind lower over the medium run.

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