Dollar on track for monthly gain

The US dollar index looks set to record its first monthly gain of 2025, rebounding after one of its sharpest opening-year slides in decades. Market sentiment remains broadly upbeat as we enter the final week of July, with investors seemingly undeterred by rising policy and geopolitical noise. Instead, risk appetite remains firmly in the driver’s seat, fuelled by momentum and solid macroeconomic data.

US equities continue to surge, with the S&P 500 logging its sixth record high of the month on Friday. A soft-landing narrative is gaining traction, supported by resilient consumer data, fading recession fears, and optimism over corporate earnings. The Nasdaq and cyclical sectors are also outperforming, reinforcing the risk-on tone. Cryptocurrencies are joining the rally too, as Bitcoin hits fresh all-time highs. Altcoins have followed suit, buoyed by growing institutional demand, new stablecoin legislation, and wider capital rotation into digital assets.

All of this is playing out against a backdrop of considerable uncertainty — including concerns over the Federal Reserve’s independence, shifts in US trade policy, geopolitical tensions, and questions over global demand resilience amid elevated tariffs. Yet for now, markets appear content to tune out the noise, leaving the dollar in a consolidative phase as it searches for clearer direction amid mixed data signals.

Importantly, last week’s stronger-than-expected US retail sales and a rebound in consumer sentiment helped ease selling pressure on the greenback. These figures underscore the resilience of the US economy and have kept expectations of imminent Fed rate cuts at bay — preserving the dollar’s yield advantage over its peers.

This week, attention turns to the flash PMIs, which will offer a timely snapshot of global economic momentum. In an environment of elevated risk appetite, any signs of weakness could disrupt the current narrative — or, conversely, reinforce it. US earnings season is also heating up, with Alphabet and Tesla among the Magnificent Seven set to report. Strong guidance could reassure investors that US corporates remain robust despite tariff pressures and persistent inflation.

 

Euro awaits a meaningful catalyst

The euro notched its second consecutive weekly decline last week, slipping 1.3% against the dollar month-to-date. Though the single currency experienced two brief rallies, both proved short-lived and highlighted the euro’s dependence on US monetary policy developments rather than its own fundamentals.

Midweek, EUR/USD surged nearly 1% following reports suggesting Federal Reserve Chair Jerome Powell might be dismissed. A second move on Friday — this time a 0.5% rise — followed dovish remarks from Fed Governor Christopher Waller, who hinted at a potential rate cut as early as July. However, both rallies quickly reversed, suggesting that while dollar-related uncertainty remains a tailwind for the euro, markets are looking for more substantive catalysts to drive sustained gains.

With the Fed now in its pre-meeting blackout period and no major trade developments expected before month-end, the short-term risks for EUR/USD remain skewed to the downside. The Fed’s tone remains hawkish for now, while the European Central Bank (ECB) appears increasingly constrained. Despite growing calls for policy easing, the ECB’s stance remains largely unchanged — though this could begin to shift if upcoming data disappoint.

This week’s ECB meeting will be closely watched, though no significant policy change is expected. With trade negotiations still unresolved and tariffs uncertain, policymakers are unlikely to offer strong forward guidance. As such, the euro may remain in limbo until clearer signals emerge from either side of the Atlantic.

 

Pound eyes stabilisation as key UK data looms

Sterling underperformed its G10 peers last week, dragged down by persistent concerns over stagflation — a toxic mix of sticky inflation and stagnant growth. Despite a climb in UK yields, the pound failed to find meaningful support, with markets viewing the current backdrop as more economically troubling than rate-positive.

GBP/USD briefly rallied on the back of renewed speculation over Trump’s influence on the Fed, but momentum faded near the 50-day moving average around $1.35 — now a clear technical barrier. The pair logged its third consecutive weekly decline, shedding more than 2% so far in July. While the broader uptrend from January’s $1.21 low remains intact, technical signals are softening: the 21-day moving average is starting to turn lower, hinting at waning trend strength. A retest of the 100-day moving average at $1.3267 could prove pivotal. A decisive break below would suggest the 2025 bullish structure is under strain, though the $1.30 level still offers robust support. The daily RSI also suggests the pound is slightly oversold, which could help stabilise price action in the near term.

This week, attention turns to a raft of UK economic data that may shape expectations for the Bank of England’s next move. Flash PMIs (Thursday) and Retail Sales (Friday) are in focus. While the services sector is expected to hold firm, manufacturing continues to underperform — a divergence that could further complicate the BoE’s policy calculus. Strong retail sales, especially if paired with firm PMIs, could offer sterling some upside support.

Markets will also scrutinise Governor Andrew Bailey’s testimony on Tuesday for clues ahead of the BoE’s August meeting, where a 25-basis-point cut is largely priced in. With business sentiment on the mend and inflation proving stickier than expected, traders are now bracing for a more cautious pace of easing. In this environment, GBP/EUR could gravitate toward levels more aligned with relative rate expectations and volatility dynamics. If Bailey strikes a balanced tone and the data holds up, sterling may find firmer footing against major currencies.