The collapse of the ceasefire between Iran and the US, and the escalating military conflict in the Middle East, has so far failed to shake markets from their summer torpor and currencies are no exception.
Interest rates are stable, stock markets continue to trade within sight of their all-time highs, and most currencies remain locked in tight ranges. Commodity currencies outperformed last week amid another spike in oil prices, while the Japanese yen fell to fresh multi-decade lows, but the moves were not particularly violent. The US dollar itself was broadly weaker following a soft batch of inflation readings. This highlighted the challenge posed to central bankers, as while energy prices are rising, there are so far few signs of second-order inflation effects in the data.
News on inflation has been largely positive across the board, making for an interesting backdrop for the ECB's July meeting on Thursday, which is the main focus for traders this week. Markets will be looking for confirmation of their expectations for a near-certain hike at the next meeting in September. The publication of the PMIs of business activity worldwide on Friday will bookend the week. UK labour data (Tuesday), CPI (Wednesday), and the PMIs on Friday will be key for the pound.
GBP
Markets breathed a sigh of relief when they learned that Shabana Mahmood was set to be chosen by Andy Burnham as the new chancellor, who will take to Downing Street for his first day on the job today. Mahmood is seen as both a centrist and a pragmatist, and someone that investors view as more fiscally responsible and business-friendly than the more radical choice, Ed Miliband.
The pound continues to outperform other European currencies, and the recent worsening of the situation in the Straits of Hormuz is an additional relative tailwind for sterling. However, the lack of policy detail from the new premier casts a pall of uncertainty over British assets starting today when Andy Burnham begins his premiership formally. We continue to think that the rally in GBP has gone too far in the near-term.
EUR
The ECB is all but certain to leave rates unchanged at its July meeting on Thursday and maintain its wait-and-see approach, as officials pause for breath until they receive greater clarity on the state of the Iran war peace negotiations. However, markets are fully expecting a hike at the next meeting in September, and the key to this week's event will be whether communications from the central bank validate that level of certainty.
European natural gas prices are rising faster than oil on renewed hostilities between the US and Iran, so the collapse of the ceasefire is an additional headwind for the common currency. Nevertheless, rate differentials are again the main driver of the EUR/USD cross rate and those have moved very little, which explains the euro's relative resilience.
USD
June CPI inflation data out of the US was significantly lower than expected in both the headline and core indices, while the producer price inflation report also surprised to the downside. However, Federal Reserve officials continue to stress that inflation remains the primary focus for policymakers and that they will not overreact to the release of a solitary report, which means markets are delaying but not erasing their expectations for rate hikes.
The combination of disinflation and a rebounding labour market is buoying both equities and bonds, offsetting the fears of a renewed Middle East war. The impact on the dollar is less straightforward. As a safe haven, the greenback should be trading higher on the renewed war uncertainties, but expectations for a narrowing in rate differentials is having the opposite effect. Nevertheless, the greenback continues to trade well against most of its G10 peers.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- G3 FX Outlook - July 2026
- G10 FX Outlook - July 2026
