The US Dollar (USD) experienced moderating gains towards the end of the week, as US yields retreated and risk appetite improved following a tech-led selloff, according to Scotiabank strategists Shaun Osborne and Eric Theoret. High-beta currencies outperformed, with the Euro (EUR) and British Pound (GBP) edging higher, although neither fully capitalized on positive domestic data surprises. Geopolitical tensions surrounding Iran and the upcoming Federal Open Market Committee (FOMC) meeting continue to provide support for the Dollar and US yields, with swaps pricing indicating a not insignificant risk of a Fed hike next week (7bps of tightening priced in) [1].
Rabobank's Senior FX Strategist Jane Foley noted that the EUR/USD pair remains wary after the July European Central Bank (ECB) meeting. Despite a hawkish tone from the ECB, the Euro failed to gain support, as CFTC speculators’ position data show confidence in the EUR has been low since the start of the Iran war. The USD has benefited from safe haven flows and hawkish Fed expectations, with further intensification of the Iran conflict potentially boosting these trends. Foley expects EUR/USD to trade in a choppy range around 1.14 over a 1-to-3-month horizon [2].
The British Pound advanced by approximately 0.20% on Friday as oil prices tumbled, weighing on the USD. Despite daily gains, GBP/USD is set to finish the week with losses of nearly 0.70%. Improved risk appetite was attributed to Pakistan’s efforts to resume US-Iran talks and statements from US President Trump regarding China and Russia's stance on Iran. US S&P Global data showed manufacturing PMI easing from 53.9 to 53.8 (below estimates), while services PMI improved from 51.2 to 53.6 (above forecasts), partly due to the World Cup. Fed rate hike expectations for July increased, with odds of a hike rising to 41%, up nearly 8% from a day ago, while odds of holding rates at 3.50%-3.75% stand at 59%. In the UK, S&P Global reported expansion in Composite, Services, and Manufacturing PMIs, exceeding forecasts, but uncertainty over new Prime Minister Andy Burnham's fiscal policy capped GBP/USD gains. Next week, the Fed is expected to hold rates unchanged, though the chance of a hike could reach 50%. The Bank of England is likely to hold rates unchanged, with odds at 88%. If the Fed raises rates and the BoE holds, this could lead to further GBP/USD downside due to a widening US-UK interest rate differential [3].
According to the weekly currency performance table, the British Pound was the strongest against the Swiss Franc, while it lost 0.84% against the USD and 0.45% against the EUR [3].
CONCLUSION
The US Dollar's gains have softened amid falling oil prices and retreating yields, while Fed rate hike expectations have increased ahead of the FOMC meeting. Both the Euro and British Pound saw modest gains but failed to fully leverage positive data, with geopolitical tensions and central bank decisions remaining key drivers. Market sentiment is cautious, and the upcoming FOMC and Bank of England meetings are expected to shape further currency moves.