Dollar at a Crossroads: Oil, Iran, and the FX Chessboard.
Dollar direction hinges on Iran’s next move, with oil prices the key catalyst for a stronger USD.
Markets skeptical of lasting geopolitical escalation, keeping the dollar’s rally and Brent prices in check.
Euro and krona most exposed to oil shocks, due to energy dependence, while NOK remains resilient.
Geopolitical risks outweigh eurozone data this week, though key CPI and sentiment releases are due.
Pound highly sensitive to UK data, with dovish BoE signals and elevated rate levels putting pressure on GBP.
USD: Dollar Holds Its Breath on Iran’s Next Move
Following the weekend’s US strikes in Iran, the dollar’s rise has been muted—especially given its oversold, undervalued state. This is part of an ongoing pattern: markets are quick to punish the greenback but hesitant to reward it. A significant and sustained jump in oil prices would be needed to truly shift sentiment, especially as that would diminish the appeal of oil-sensitive safe havens like the euro and yen, potentially nudging investors back into dollar positions.
Markets currently see a limited chance of a lasting oil shock. Brent crude briefly climbed above $80/bbl but slipped back near $78, hinting that traders aren’t yet convinced this conflict will have staying power. If tensions fade quickly, the default trade may return to shorting the dollar on broader US economic weakness.
The wild card remains Iran’s response. Rumblings of potential disruption in the Strait of Hormuz—through which a significant portion of global oil flows—could push prices higher and force traders to reverse dollar short positions before calm resumes.
US data may take a back seat this week. Friday’s core PCE is unlikely to shift rate expectations materially, with the Fed maintaining a cautious tone. Still, attention will be on Chair Powell’s congressional testimony and S&P Global PMIs due today, plus consumer confidence tomorrow.
EUR: Oil Exposure Makes Euro Vulnerable
The euro and Swedish krona were early casualties as FX markets reopened, despite both being top G10 performers this year. Their vulnerability stems from high energy dependence, which makes them less resilient in an oil price spike. Norway’s NOK, by contrast, is oil-positive.
Despite several tests of the 1.1450 support in EUR/USD since mid-June, traders aren’t yet convinced that the geopolitical flare-up will offer much upside to the dollar or downside to the euro. The 1.1450–1.1600 range may remain intact unless a major US macro event shakes things up.
This week brings a busy eurozone data calendar: today’s PMIs and Tuesday’s Ifo surveys are expected to show modest improvements, aided by easing global trade pressures. France and Spain will also release June CPI flash estimates on Friday. With uncertainty high, EUR/USD could drift toward 1.140 in the short term, but geopolitical news will call the shots.
GBP: Sterling Faces Data-Driven Sensitivity Test
UK PMIs for June are expected to tick up slightly, echoing trends in the US and eurozone. However, the pound may react more sharply to data than its G10 peers. A dovish tilt from the Bank of England last week, coupled with soft economic readings, has left markets on edge about further rate cuts.
Traders are pricing in two rate cuts by year-end, which aligns with our forecast. But if UK data weakens further, speculation could build for even deeper easing—especially with UK rates still among the highest in the G10.
EUR/GBP’s rally stalled around 0.8550, yet we see room for further upside. A break above 0.860 could open the door to retesting April highs near 0.871. That level would likely require a more aggressive policy shift from the BoE, which remains uncertain for now.