FX Market Update: Data, Central Banks & Political Developments.

• USD – Remains supported by safe-haven demand and rising geopolitical tensions in the Middle East, though gains have been uneven and some recent strength is fading this morning.

• EUR – Is holding up better than expected despite higher energy prices, with markets increasingly leaning toward further ECB rate hikes later this year.
  

• GBP – Is edging higher ahead of a pivotal week of UK data and political developments, with fiscal credibility expectations likely to be a key driver for sterling.

USD:

The dollar has received support from renewed safe-haven flows after energy prices climbed again following reports of further escalation and U.S. casualties in the Middle East. While the currency has strengthened modestly over recent days, it is giving back some of those gains this morning, suggesting that bullish momentum is not yet firmly established.

Geopolitical developments in the Gulf are likely to remain an important background factor for markets, while the key economic catalysts are concentrated toward the end of the week. Thursday’s initial jobless claims data and Friday’s PMI surveys will be closely watched for signs of whether U.S. growth is cooling. In addition, major corporate earnings releases could influence risk sentiment, with the dollar typically benefiting if equity-market volatility increases.

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EUR: 

The euro is proving more resilient than many had anticipated despite the fresh rise in energy prices, which would normally be seen as a headwind for the euro area. A key reason is that expectations for further European Central Bank tightening have been increasing faster than expectations for additional Federal Reserve action.

Markets are now leaning toward two more ECB rate hikes later this year, although only a small probability is attached to a move at this Thursday’s meeting. Any surprise hike could provide a significant boost to the single currency, but the main focus is likely to be on the ECB’s forward guidance and how policymakers assess inflation risks from higher energy costs.

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GBP: 

Sterling is trading slightly firmer this morning ahead of what is shaping up to be a critical week for the UK. Markets will have a substantial amount of data to digest, including wage growth, inflation, retail sales, consumer confidence, and PMI readings.

Political developments are also in focus, with Andy Burnham set to become Prime Minister and investors paying close attention to the appointment of Shabana Mahmood as Chancellor. The pound has performed particularly well against other major currencies in recent weeks as markets have welcomed expectations of a fiscally responsible approach. Whether sterling can extend those gains, particularly against the euro, may depend on the credibility of the government’s initial policy announcements over the coming days.

Economic Calendar