The latest flare up in tensions between the US and Iran failed to trigger any significant safe haven flows in currency markets, or in any financial markets for that matter.
Equity markets traded near record highs, and currencies moved in tight ranges without a clear hint of risk aversion. Investors have clearly learnt not to take President Trump’s remarks too literally, and as we know Trump has a long track record of being more bark than bite. At any rate, it remains to be seen whether his latest promulgations are indeed all part of the negotiating theatre that has characterised both of his careers in business and politics, rather than a complete impasse in negotiations. Certainly, the absence of market moving economic or monetary policy releases also helped keep things calm.
Inflation data will be front and center this week in the US. The CPI inflation report for June is released on Tuesday, and a decent pullback is expected on the back of lower energy prices, albeit this is perhaps slightly dated given the recent moves there. With the Fed in the process of restricting forward guidance, but still apparently inclined to hike, every inflation data point takes on added importance. Eurozone industrial production (Wednesday) and UK monthly GDP (Thursday), both for the month of May, will also be on traders' radar.
GBP
The pound continues to outperform other European currencies, notably the euro. This is somewhat puzzling to us given the elevated political risk premium in Britain. Markets are taking a fairly optimistic view of the near certainty of an Andy Burnham premiership, which looks set to be confirmed on Friday. Burnham has been quite vague about his intended economic policies, however, and we think that markets are underestimating the fiscal risks posed by his preference for greater spending, which we expect to be funded by a mix of both higher rates of taxation of increased gilt issuance.
The first key test will be Burnham's pick for chancellor, which we suspect will be announced on his first full day in office next Monday. Ed Miliband remains the clear front-runner and the most likely name to land the top cabinet job - this may upset markets given that his appointment would likely herald a return to borrow-and-spend Labour policy. On the positive side, a Yvette Cooper pick would probably be the most reassuring of the plausible alternatives. These news should be more market moving than any of the economic or policy news on tap this week.
EUR
The minutes for the European Central Bank’s June meeting published last week were studiously non-committal about the outcome of the September meeting, which led traders to modestly reduce the likelihood that we will see another hike. The generally better tone of recent economic news and the softer inflation numbers in June pull in opposite directions, and it seems clear the decision will be a close one. Yet the euro held up quite well last week, which can be partly attributed to the common bloc’s high exposure to imported oil inflation that has led to a narrowing in US-Euro Area rate differentials in favour of the euro.
Since the outcome of upcoming ECB rate decisions will not be clear for some time, we expect the recent tight range in the EUR/USD cross to hold for now. That said, we could see some fresh upside should President Trump double down on his renewed plans to purchase the island of Greenland, which buoyed the euro last week amid returning fears over the sanity of White House decision making.
USD
Markets expect a relatively benign June CPI report this week, with a significant pullback in headline inflation and a relatively mild 0.2% monthly print in the core subindex. Fixed income markets are trading nervously, with the 30-year Treasury rate approaching 20-year lows after the release of last week’s Fed meeting minutes. The minutes themselves offered a bit of something for everyone, as while the hawks argued that hikes could be warranted should inflation stay high, there were some members of the committee that said the fed funds rate could stay around or just below current levels should inflation ease.
Any upward surprise in Tuesday’s inflation report could have significant consequences in the bond market, and the resulting higher rates could temporarily buoy the US dollar, but we think the greenback is not trading far from equilibrium levels currently.
CNY
The Chinese yuan closed the week almost flat against the US dollar. Attention centered on inflation data: consumer price growth slowed more than expected to 1%, dragged down by a surprise drop in the core measure, underscoring how weak domestic demand continues to weigh on price pressures. Producer price inflation, by contrast, hit a four-year high of 4.1%, supported by base effects - on a month-on-month basis, prices fell 0.3%, their first decline in nearly a year, as oil prices dropped sharply following the US-Iran framework ceasefire deal.
This week brings one of the busiest domestic data calendars in some time. Alongside the broad monthly data dump for June, second quarter GDP figures are due. These should confirm the loss of momentum already visible in higher-frequency indicators, with year on-year growth expected to slow to 4.5% - the lower bound of this year's target.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- FX Monthly - July 2026
- G10 FX Outlook - July 2026
