Dollar’s Last Stand: One Final Burst Before the Summer Slowdown.
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US-EU Trade Deal brings relief but lacks full resolution; markets await updates on pharma and further Asia-focused trade progress.
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Busy US Data Week with jobs, GDP, inflation, and the Fed meeting likely to support the dollar and reduce chances of a September rate cut.
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Eurozone Growth Risks suggest the ECB may cut rates in September, a move markets aren’t fully pricing in.
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EUR/USD Unlikely to Break Higher near term due to weak data, long positioning, and negative carry; downside risks dominate.
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Sterling Remains Fragile, especially against the dollar; GBP/USD could drop further if US data fuels dollar strength.
USD: One Last Push Before August Slumber
Markets have reacted positively to the announcement of a US-EU trade agreement. The deal aligns closely with what was leaked last week: a 15% baseline tariff and substantial EU commitments to purchase US goods and energy. While more palatable than the 30–50% tariff threats floated earlier this year, it still falls short of a more optimistic, zero-tariff outcome. Key details—such as the treatment of the pharmaceutical sector—are still pending, with potential updates due later this week. Attention now shifts to unresolved trade matters with South Korea, Taiwan, India, and possibly further negotiations with Mexico and Canada.
European leaders will hope this clarity gives businesses the confidence to resume investment. Expect markets to scrutinise forward-looking indicators like investment components in PMI data closely.
Despite the headline-grabbing nature of the deal, FX markets barely budged overnight—likely because much of this was already priced in. However, the US has a data-heavy week ahead that could bolster the dollar. Key releases include job openings (JOLTS on Tuesday), Q2 GDP (Wednesday), core PCE inflation (Thursday), and the Nonfarm Payrolls (Friday). A solid data lineup should reinforce the Fed’s patient stance and reduce odds of a September rate cut.
As August approaches, expectations are for a quieter market environment. This makes carry trades more attractive, and with short-term USD rates at 4.37% p.a., the dollar doesn’t look like a compelling funding currency. We maintain our view that the dollar is entering a consolidation phase, with DXY drifting back toward the 98.50–99.00 range—provided the data cooperates.
EUR: Trade Truce Brings Breathing Room, Not Breakout
DAX futures are up 1.2% as traders embrace some clarity on trade policy. While the deal could still evolve, the immediate benefit is that businesses can resume planning. This comes as eurozone fundamentals remain reasonably sound, with high savings rates, leaner inventories, and the potential for meaningful fiscal stimulus.
EUR/USD may still gravitate toward 1.20 by year-end, but near-term risks lean toward a correction. Market pricing is overly optimistic about the ECB holding rates steady—only a 15% chance is priced for a September cut. This seems too low given expectations for flat Q2 GDP (Wednesday) and July inflation slipping below 2.0% (Friday).
With speculative positioning already skewed long euros—and the euro suffering from a negative carry versus the dollar—it’s hard to justify an immediate breakout above 1.1830. Instead, a drift back below 1.1700 looks more likely, possibly testing 1.1600 if the Fed holds firm this week.
GBP: Euro Strength Looks Capped; Sterling Vulnerability Lingers
EUR/GBP has settled comfortably above the April highs around 0.8735, but a push to 0.88 isn’t guaranteed. This week’s eurozone data could cap the euro’s momentum, and with August expected to be subdued, long EUR/GBP positions come with a carry cost. With little on the UK economic calendar to stir activity, the cross may chop sideways in a 0.8700–0.8770 range.
GBP/USD looks far more exposed. We see scope for a retest of the 1.3370 support level. Should this break—and if US data surprises positively—we could see an extended decline toward 1.3150.