Sterling holds firm as the euro comes under pressure
Market overview
FX markets are opening the week with a widening divide between the major currencies and their commodity-linked counterparts. Higher oil prices are supporting the Norwegian krone, Australian dollar and Canadian dollar, while the euro faces renewed pressure from the eurozone’s dependence on imported energy. Sterling remains caught between cautious Bank of England expectations and rising inflation risks, while the dollar has yet to attract the decisive safe-haven demand normally associated with a geopolitical shock.
Investors continue to view the renewed conflict as an attempt to strengthen negotiating leverage rather than the beginning of a prolonged regional crisis. That relatively calm assessment has limited broader risk aversion and allowed commodity currencies to benefit from higher energy prices without suffering the heavy selling often seen during periods of geopolitical stress.
The duration of the conflict will now be critical. A sustained escalation would increase inflation expectations, weaken growth prospects in energy-dependent economies and potentially revive demand for traditional safe havens. Until then, relative energy exposure and interest-rate expectations are likely to remain the main drivers across FX.
USD: The Fed faces a high bar
The dollar has struggled to convert geopolitical uncertainty into a convincing safe-haven rally. The DXY index remains below its late-June high of 101.800, while USD/NOK has fallen by more than 3% this month as stronger oil prices continue to support the krone.
Attention now turns to the July FOMC meeting. Rates are expected to remain unchanged, although markets continue to price close to two increases by year-end. With no updated economic projections and June inflation coming in softer than forecast, the Fed may struggle to deliver a message that materially strengthens the dollar.
Higher oil prices could reinforce inflation concerns, but the wider policy backdrop still supports a cautious and data-dependent approach. Kevin Warsh is also unlikely to be viewed as clearly hawkish or dovish, given his reluctance to rely heavily on forward guidance.
The bar for further dollar gains therefore appears high. A largely uneventful Fed meeting may not be enough to drive a sustained move higher, while safe-haven demand is likely to remain restrained unless the geopolitical situation becomes more prolonged or disruptive.
GBP: Sterling faces a two-sided BoE
Sterling enters the week with its relative rate advantage intact, but with greater event risk. GBP/USD has eased after rising from around 1.32 in June to almost 1.36 in mid-July, levels that have repeatedly acted as important support and resistance since 2025.
Markets currently assign only around a 60% probability of a September Bank of England rate increase. This is notably less tightening than is priced for either the ECB or the Federal Reserve. Governor Andrew Bailey has shown little urgency to raise rates, while a softer labour market, weaker economic activity and a third consecutive downside surprise in the Decision Maker Panel survey support a more patient approach.
Thursday’s decision may therefore depend less on the headline rate and more on the vote split, updated projections and policy language. The previous meeting produced a 7-2 vote, while second-quarter inflation averaged 2.8%, below the Bank’s 3.1% forecast.
A larger group of policymakers voting for higher rates, or guidance suggesting that another increase remains under active consideration, would support sterling. A neutral hold with little indication of future tightening would leave the currency vulnerable to modest selling.
GBP/EUR begins the week near 1.1717 after reaching a thirteen-month high of 1.1824. The medium-term structure remains constructive while the pair holds above the 1.1670 to 1.1700 support area. A move higher would reopen 1.1750 and 1.1800, while a decisive break below support would point to a longer period of consolidation.
The UK’s fiscal backdrop also warrants attention. Proposed social care expansion, alongside cuts to electricity VAT, bus fares and business rates, points towards a looser policy stance. This can support sterling through higher inflation expectations and UK yields, but only while investors remain confident that the additional spending will be funded responsibly.
Any deterioration in fiscal credibility could quickly reverse that support and place renewed pressure on the pound.
EUR: Energy costs eclipse ECB hawkishness
The euro remains under pressure after EUR/USD broke below 1.14. The move is significant because it occurred despite increasingly hawkish ECB communication, showing that higher rate expectations are no longer sufficient to lift the single currency.
ECB President Christine Lagarde confirmed that some Governing Council members considered a rate increase, strengthening expectations that the central bank could tighten again in September. Markets, however, remain more focused on the eurozone’s exposure to higher energy costs and the resulting threat to growth, inflation and competitiveness.
July’s PMI figures initially appeared supportive. The composite index rose to 51.9 from 50.0, with improvements across manufacturing, services, new orders and employment. However, the surveys were completed before the latest rise in crude prices, limiting their relevance to the current outlook.
The euro is therefore caught in an unfavourable policy mix. Higher energy prices may justify tighter monetary policy, but they also weaken the economic backdrop the currency ultimately reflects. At the same time, the Federal Reserve may need to remain restrictive for longer, pushing two-year EUR/USD real-rate differentials to their most dollar-supportive levels since late 2024.
Unless geopolitical tensions ease and energy prices retreat, EUR/USD is likely to remain under pressure. The mid-1.13 area is becoming an increasingly important test for the pair.
Looking ahead
FOMC: Focus on whether policymakers validate expectations for close to two further rate increases this year.
Bank of England: Watch the vote split, inflation projections and any indication that another increase remains under consideration.
Energy prices: Further gains would favour commodity-linked currencies while increasing pressure on the euro and other energy importers.
GBP/EUR: Support sits at 1.1670 to 1.1700, with 1.1750 and 1.1800 the next upside levels.
EUR/USD: A sustained move below the mid-1.13s would reinforce the bearish outlook.
Geopolitics: A prolonged conflict would increase the probability of a stronger dollar safe-haven bid.
UK fiscal policy: Sterling remains supported while higher spending lifts yields without undermining confidence in the public finances.