FX ranges tighten as uncertainty builds
Market overview
FX markets remain cautious as investors balance softer inflation data against renewed geopolitical risks and firmer energy prices. The dollar has extended its recent recovery, although further gains may require a clearer catalyst from economic data or central bank policy.
Sterling has surrendered some of its recent strength, while the euro remains under pressure from higher energy costs and subdued risk appetite. With major central bank meetings and July business activity data approaching, near-term trading ranges could remain tight.
USD: Further gains require a stronger catalyst
The US Dollar Index advanced for a fourth consecutive session, closing above 101. However, it remains below the 24 June peak of 101.80, reached when markets adopted a more hawkish outlook for Federal Reserve policy.
Recent US inflation figures and a weaker June employment report have reduced confidence that the Fed will deliver significant further tightening this year. With policymakers now in their pre-meeting blackout period, markets have limited opportunity to receive fresh guidance before the next decision.
Higher oil prices could provide renewed support by lifting inflation expectations and US yields. However, with the two-year SOFR OIS rate already close to its highest level since early 2025, the threshold for another meaningful hawkish repricing remains high.
Safe-haven demand has also been limited. Investors continue to view the latest geopolitical escalation as part of a wider negotiating process, particularly as mediators attempt to revive the truce and both sides leave the door open to diplomacy.
The Dollar Index may therefore remain within the 100.50 to 101.50 range until markets receive a more decisive signal.
GBP: Sterling correction highlights fiscal sensitivity
Sterling’s decline appears to reflect a currency-specific correction rather than a wider shift in global risk sentiment. Equities remained firm, volatility was contained, higher-risk currencies strengthened and gilt yields were broadly unchanged.
Profit-taking following the pound’s strong recent performance is likely to have contributed. Investors may also be reassessing the level of confidence placed in the new Burnham government, particularly following its unfunded spending commitment earlier this week.
GBP/EUR had climbed above 1.18 to its highest level in a year and appeared stretched relative to interest rate differentials, leaving the pair vulnerable to a pullback. The move also serves as an early indication that sterling could remain highly responsive to future decisions on borrowing, spending and fiscal discipline.
UK inflation data offered some relief. Headline CPI slowed from 2.8% to 2.6%, below expectations, while core inflation remained at 2.6%. Services inflation eased to 3.6%, although it was slightly stronger than forecast.
The figures point to cooling domestic price pressures, but investors remain focused on higher oil prices and the possibility of rising household energy bills. Markets still expect the Bank of England to leave rates unchanged next week, while pricing approximately one increase by the end of the year.
Firm energy costs should continue to support short-term gilt yields and preserve part of sterling’s yield advantage, despite weak economic momentum.
EUR: Energy exposure limits rate support
EUR/USD remains confined to the 1.1400 to 1.1450 range, with near-term risks tilted lower as geopolitical tensions persist.
Although interest rate differentials have recently moved in the euro’s favour, the currency has struggled to benefit. The eurozone’s reliance on imported energy remains an important weakness, as rising energy prices increase import costs and damage the region’s terms of trade.
The relatively controlled reaction across global markets has prevented a sharper decline towards the June low of 1.1325. However, the euro may struggle to regain momentum unless geopolitical conditions improve and a credible path towards de-escalation emerges.
The European Central Bank is expected to leave policy unchanged at tomorrow’s meeting. With limited scope for a major policy surprise, euro trading may remain subdued. Without an improvement in risk sentiment, EUR/USD could return below 1.1400.
Looking ahead
ECB meeting: Rates are expected to remain unchanged, with guidance likely to drive the euro’s response.
Federal Reserve expectations: Markets will continue to assess whether energy prices justify renewed tightening expectations.
UK fiscal policy: Further spending commitments could increase volatility in sterling and gilts.
July PMIs: Preliminary business activity figures on Friday may provide the next meaningful test for the dollar.
Geopolitical developments: Progress towards a ceasefire could weaken safe-haven demand and support European currencies.