The US-Iran pause is over

USD

After several days of calm, tensions in the Middle East ramped up overnight, with the US and Iran once again exchanging tit-for-tat strikes. Brent jumped around 3.5% in response, though FX has been calmer, seeing the DXY holding near one-month highs before softening modestly this morning. Attention now turns to tonight's FOMC decision at 19:00 BST, with Chair Warsh's press conference following at 19:30. Markets price roughly a one-in-three chance of a 25bp hike from the current 3.50-3.75% range, with no fresh projections due. We continue to think rates stay on hold through year-end; if validated today, near-term dollar risks skew modestly lower, overnight escalation notwithstanding.

EUR

The euro remains stuck. Having slipped to a one-month low in early European trade yesterday, EURUSD clawed back losses as soft US data weighed on the greenback, ending marginally firmer but still pinned near the floor of its range since late June. In keeping with our view that rallies should stay capped unless the truce proved durable, overnight developments have snuffed out any budding recovery. Today's euro area calendar is once again bare, leaving Fed positioning and Gulf headlines in the driving seat ahead of tomorrow's Q2 GDP and German CPI, and Friday's flash inflation print, seen ticking up to 2.9% on the headline with core steady at 2.4%. Those figures, if realised, will do little to discourage the Governing Council hawks advocating for at least one further hike.

GBP

Sterling continues to trade heavy this morning, with cable struggling to breach 1.33. This softness remains consistent with our view that a greater fiscal premium should be attached to Prime Minister Burnham despite pledges of discipline. Today's domestic calendar is bare, leaving tomorrow's MPC decision front and centre. We expect Bank Rate to be held at 3.75%, with a negligible chance of a hike priced for this week but a full move by November still embedded in swaps, pricing that continues to look overly hawkish in our eyes. The vote split and the forecasts' treatment of the oil shock matter most, and we still expect pushback from Governor Bailey, which should keep sterling a laggard alongside political uncertainty.

CAD

The loonie quietly outperformed yesterday, notable given WTI probed fresh weekly lows sub-$80 during European hours. We flagged yesterday that our neutral USDCAD baseline assumed no fireworks in the aftermath of President Trump's meeting with PM Netanyahu; in the event, the 90-minute Oval Office session was billed as productive, but fireworks arrived hours later courtesy of Tehran's missile salvo. Today finally brings domestic events: the BoC publishes its Summary of Deliberations from the July 15 decision at 13:30 ET (18:30 BST), offering colour on how the Council weighed the oil shock against domestic disinflation. The Fed matters more, however: with a hike substantially priced, a hold should swing rate differentials in the loonie's favour, as we suggested yesterday.

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