Dollar Dims as Geopolitical Engine Stalls.
USD weakens as markets unwind risk-off positions amid delayed U.S. action on Iran.
EUR/USD climbs above 1.150, though Middle East tensions cap further upside.
Oil remains central to FX sentiment, with Brent supported but range-bound.
Norges Bank surprises with a rate cut, defying market expectations.
BoE vote split (6-3) suggests growing support for an August rate cut.
USD: Market Repositions as Iran Tensions Simmer
The White House has signalled it may decide on direct military action against Iran within two weeks. This reduces the likelihood of both swift escalation and swift de-escalation in the Middle East, which has kept Brent crude supported, though not strong enough to breach the $80/bbl mark. Meanwhile, Iran is reportedly rushing to export oil amid fears of logistical disruption.
Currency markets have taken the lowered near-term threat of U.S. military action as a cue to re-enter short USD positions, especially versus European currencies. This underscores how sensitive the dollar is to the steady flow of oil-driven, risk-off geopolitical headlines—without them, the greenback struggles in a market structurally skewed toward USD shorts.
On the macro front, today’s key releases include the Philadelphia Fed survey and the Conference Board’s Leading Index. Both are expected to show modest improvement. The Federal Reserve’s communication blackout has ended, though no speakers are scheduled until Monday.
Oil and Middle East dynamics remain the dominant FX narrative, and in the absence of major developments, the DXY may hover around current levels.
EUR: Edges Higher, But War Risk Lurks
EUR/USD has pushed back above 1.150 as markets reduce their geopolitical risk pricing. However, with the Middle East outlook still unstable, traders are cautious about pushing the pair toward 1.160, particularly given the potential for U.S. involvement in the conflict.
Macro developments in the eurozone are offering little direction for now. Notably, the two-year EUR/USD swap spread has remained steady between 165–170 basis points since the last ECB meeting.
In an unexpected move, Norges Bank cut rates by 25bp yesterday. While some had flagged the conditions as ripe for a cut, few expected the central bank to defy consensus so decisively. We now foresee two more cuts from Norges Bank, though that may not halt EUR/NOK’s gradual appreciation.
GBP: BoE Vote Split Hints at August Cut
Sterling barely flinched after the Bank of England left rates unchanged. As in past meetings, little forward guidance was offered, leaving the vote split as the main insight into policymakers’ thinking. The 6-3 split in favour of a cut is a mild dovish signal and has firmed market expectations for an August rate reduction.
We anticipate two rate cuts in total this year. But with soft UK data, markets may lean further into the dovish narrative. We maintain a bullish multi-month view on EUR/GBP.