Energy relief reshapes the FX landscape
Market overview
FX markets are responding to a more constructive mix of lower energy prices, improving risk appetite and softer US labour data. Reports of progress towards reopening the Strait of Hormuz have driven oil prices sharply lower, easing inflation concerns and reducing demand for defensive currencies. The dollar has lost ground, while the euro and several higher-beta currencies have benefited from renewed confidence in global growth.
The broader picture remains finely balanced. Economic activity is proving more resilient than expected across the US, UK and eurozone, but inflation pressures have not disappeared. This leaves markets caught between fading expectations of further policy tightening and the risk that central banks keep rates restrictive for longer. Recent currency moves therefore look more tactical than the start of a decisive new trend.
USD: Dollar correction gathers pace
The US dollar remains under moderate selling pressure, with the DXY falling below 99.8. A reported US-Iran interim agreement to reopen the Strait of Hormuz has contributed to a 12% decline in oil prices this week, helping to ease inflation concerns and reduce expectations of further Federal Reserve tightening.
The dollar is also facing pressure from last week’s yen intervention and continued foreign selling of longer-dated US fixed-income assets. Expectations of a September rate increase have fallen further following a weaker-than-forecast ADP employment report.
The rates signal is less straightforward. Short-dated Treasury yields have eased, but longer-term yields remain elevated following the July Fed meeting. Chair Warsh stopped short of supporting higher rates to control inflation, encouraging a steeper yield curve as investors seek greater compensation for longer-term price risks.
US data also present a mixed picture. The ISM services survey was slightly disappointing, with employment falling sharply and prices paid rising unexpectedly. However, the S&P Global Composite PMI reached its highest level since October 2025, underlining the resilience of private-sector activity.
Lower oil prices and softer employment figures have weakened the dollar’s near-term support. Even so, firm growth and persistent inflation suggest markets may be too quick to dismiss the higher-for-longer outlook. The current decline in the USD still appears corrective rather than structural.
GBP: Sterling follows the global risk cycle
Sterling has delivered an uneven performance, with global developments carrying more influence than UK-specific news. Its strongest gain has come against the oil-sensitive Norwegian krone, while the pound has also recovered modestly against the yen.
By contrast, GBP has underperformed currencies such as the Swedish krona and Australian dollar as stronger equity markets encouraged investors to move into higher-beta assets. This highlights sterling’s position between defensive currencies and more cyclical parts of the FX market.
GBP/USD briefly moved above 1.3450 as oil prices fell and risk appetite improved, although the pair remains marginally lower over the week. Cable continues to consolidate within the broad 1.32 to 1.35 range that has contained much of this year’s trading.
GBP/EUR is holding near the mid-1.16 area after retreating from July’s one-year highs above 1.18. The move has brought the cross closer to prevailing interest-rate differentials. Firmer ECB expectations and a less compelling Bank of England yield advantage have reduced the scope for further sterling gains.
Domestic data were more encouraging. The UK Composite PMI rose to 52.2 in July from 49.3, its strongest reading since April. Services returned to growth, while manufacturing output increased at its fastest pace since September 2024. The figures point to underlying resilience, although sterling remains more sensitive to global rates, energy prices and market sentiment.
EUR: Lower energy risk lifts the euro
The euro has extended its recovery, with EUR/USD moving above 1.1550 to its highest level since mid-June. Improving risk appetite and falling energy prices have supported demand for the single currency.
Reports of a broader US-Iran agreement to reopen the Strait of Hormuz have reduced fears of a renewed energy shock, removing a significant threat to the eurozone outlook. While lower energy costs have encouraged a modestly more dovish reassessment of ECB policy, the potential improvement in regional growth prospects is proving more important for the currency.
This brighter backdrop was reflected in the latest survey data. The Eurozone Composite PMI was revised higher to 52.0 in July from 50.0 in June, marking the strongest expansion in eight months and the first clear return to growth since March.
The near-term case for the euro has strengthened, but durability remains the key question. Further gains will depend on whether lower energy prices persist and whether diplomatic progress produces a lasting reduction in geopolitical risk.
Looking ahead
Markets will assess whether the decline in oil prices can be sustained and how quickly it feeds into inflation expectations.
US labour and inflation releases will be central to the next shift in Federal Reserve pricing.
EUR/USD may remain supported while energy risks recede, although further gains will require continued improvement in eurozone activity.
GBP/USD is likely to remain range-bound unless global risk sentiment or rate expectations deliver a stronger catalyst.
Longer-dated US Treasury yields remain an important risk for the view that the dollar’s decline is only temporary.