FX Market Update: Dollar Strength Builds as Oil Rises, Sterling Softens on Mixed Inflation.

• USD – Remains the strongest of the three currencies, supported by rising oil prices, higher U.S. rate expectations, and ongoing geopolitical tensions.

• EUR – Is under modest pressure, largely driven by broad U.S. dollar strength rather than domestic Eurozone developments.
  

• GBP – Remains the weaker performer, with mixed inflation data and fiscal concerns weighing on sentiment despite expectations for further Bank of England tightening.

USD:

The U.S. dollar continued to strengthen yesterday, buoyed by rising oil prices and escalating geopolitical tensions surrounding Iran. Higher energy prices, alongside renewed speculation that the Federal Reserve could deliver a second rate hike later this year, have widened U.S. interest rate differentials in the dollar’s favour. Meanwhile, USD/JPY reached its highest level since 1986, highlighting the breadth of dollar strength, although markets remain alert to the possibility of intervention from Japanese authorities should the pair climb further. Attention now turns to mortgage applications today, followed by jobless claims and PMI data later this week, which could provide further direction for the greenback.

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EUR: 

The euro has edged lower over recent sessions as broad-based U.S. dollar strength continues to dominate the market. Domestic Eurozone developments have taken a back seat, with EUR/USD movements instead being driven by U.S. monetary policy expectations, geopolitical developments in the Gulf, and higher energy prices. The European Central Bank now comes into focus ahead of tomorrow’s July policy meeting, where investors will be looking for guidance on the future path of interest rates. Unless the ECB delivers a more hawkish message than expected, the euro is likely to remain on the defensive against the stronger dollar.

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GBP: 

Sterling extended its retreat from recent highs as the stronger U.S. dollar and concerns over UK fiscal policy continued to weigh on sentiment. Today’s inflation report delivered a mixed picture, with headline CPI falling more than expected to 2.6%, while core inflation unexpectedly held steady at 2.6%, suggesting underlying price pressures remain persistent. Although inflation is moving closer to the Bank of England’s 2% target, markets continue to expect one or two further rate hikes later this year. Even so, sterling may struggle to regain momentum in the near term while the dollar remains well supported and fiscal uncertainty lingers.

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