Risk appetite builds, but the dollar refuses to retreat
Market overview
Foreign exchange markets are balancing stronger risk appetite against persistent uncertainty over interest rates, growth and geopolitics. Falling oil prices, record equity markets and hopes of progress in the Middle East are supporting sterling and the euro, but the dollar remains resilient as investors continue to price the possibility of further Federal Reserve tightening. With US data, rate expectations and key technical levels all in focus, the next move across major currency pairs may depend on whether the current risk rally can hold.
The wider market backdrop remains constructive. The S&P 500 has reached its 35th record high of 2026, supported by an earnings season that continues to outperform already elevated expectations. Second-quarter earnings growth is tracking close to 33% year on year, around three times the historical median outside recessionary periods.
Earnings forecasts have also risen throughout reporting season, rather than fading after companies cleared initial expectations. Leadership remains concentrated in semiconductors, large technology companies and energy, keeping the rally closely linked to artificial intelligence investment, cloud demand, margins and energy profits.
Reports of a possible US-Iran ceasefire have added to the positive tone. A proposed agreement could allow traffic to pass through the Strait of Hormuz without a fee for 60 days, helping Brent crude fall below $80 per barrel. Lower oil prices have eased inflation concerns, pushed market rates lower and strengthened demand for risk assets.
USD: Dollar holds firm despite improving sentiment
The dollar index remains close to 100, even though lower oil prices and stronger equity markets would normally encourage broader selling. Its resilience appears to reflect concern that the Federal Reserve could still raise interest rates on 16 September.
Market pricing for that meeting has softened slightly, with around 14 basis points of tightening now expected, compared with 16 to 17 basis points earlier in the week. Lower energy prices and a slightly weaker JOLTS report have reduced expectations, but not enough to remove the prospect of further Fed action.
Today’s ADP employment report and ISM services survey will provide the next test. Regional data suggest services activity should remain firm, while an ADP reading close to the 65,000 consensus forecast is unlikely to place significant pressure on the dollar.
Friday’s US employment report remains the main macroeconomic event of the week. Until then, DXY may remain contained within the 99.50 to 100.00 range.
GBP: Lower energy prices lift sterling
Sterling has gained modestly against the dollar as oil prices extend their decline and global equity markets reach fresh highs. Brent and WTI are around 12% lower over the week, easing the UK’s energy-related terms-of-trade pressures and providing support for the pound.
The improvement in global risk appetite is also helping sterling. Speculation surrounding a US-Iran agreement and the possible reopening of the Strait of Hormuz has encouraged investors to increase exposure to risk-sensitive currencies, allowing GBP/USD to remain above its key daily moving averages.
Interest-rate differentials are offering little direction. UK gilt yields and US Treasury yields have both fallen alongside oil prices, leaving relative yield support largely unchanged. Sterling is therefore being driven more by global sentiment and energy developments than by domestic rate expectations.
The near-term tone remains supportive, although further gains may prove harder to sustain. UK yield support is becoming less compelling, while August has historically been a difficult month for the pound. Continued strength will depend on whether the improvement in global risk sentiment can offset softer domestic drivers.
EUR: Recovery faces a technical test
The euro is receiving modest support from a sharp improvement in the Eurozone-US economic surprise differential and a partial recovery in relative interest-rate spreads.
However, the move in rates partly reflects a more hawkish European Central Bank response to higher oil prices following tensions in the Middle East, rather than a decisive improvement in Eurozone growth. The recent advance therefore looks more like a correction in relative expectations than the beginning of a sustained bullish trend.
EUR/USD has recovered from its late-June low of 1.1325 and moved above former resistance near 1.1450. The pair has since encountered a more significant technical barrier around 1.1570, where the January downtrend and 100-day moving average converge.
A clearer break above this area would improve the technical outlook. Without stronger evidence of accelerating Eurozone growth or a decisive shift in rate differentials, however, the recovery is likely to remain tactical rather than structural.
Looking ahead
US ADP employment and ISM services data will shape expectations ahead of Friday’s payrolls report.
Markets will watch for confirmation of a US-Iran ceasefire and any agreement covering the Strait of Hormuz.
Further declines in oil prices could support sterling, the euro and wider risk appetite.
DXY may remain within the 99.50 to 100.00 range unless US data delivers a meaningful surprise.
EUR/USD faces resistance near 1.1570, while GBP/USD remains closely tied to global sentiment.