Forex News

• The Euro retreats against the British Pound after EUR/GBP briefly touches its highest level in more than a week.
• The ECB holds interest rates steady and warns that energy inflation could keep price pressures above target through early 2027.
• Traders fully price in a September ECB rate hike, while the UK's fiscal uncertainty limits demand for the Pound.

The Euro (EUR) trades under pressure against the British Pound (GBP) as traders assess the European Central Bank’s (ECB) latest monetary policy announcement.

At the time of writing, EUR/GBP trades around 0.8530 after hitting an intraday high of 0.8544, its highest level in more than a week.

The ECB left its three key interest rates unchanged, with the deposit facility rate, main refinancing operations rate and marginal lending facility rate held at 2.25%, 2.40% and 2.65%, respectively, after delivering a 25-basis-point hike in June.

In its monetary policy statement, the Governing Council reaffirmed its commitment to ensuring that inflation stabilises at the 2% medium-term target. However, it warned that uncertainty remains high and that the full inflationary impact of the energy shock has yet to emerge.

The ECB said it is closely monitoring the intensity and duration of the shock, as well as any indirect and second-round effects. It reiterated that future interest-rate decisions will depend on its assessment of the inflation outlook and the risks surrounding it.

Speaking after the decision, ECB President Christine Lagarde said that energy inflation is likely to keep headline inflation well above the ECB’s target through the first half of 2027 before easing. She noted that “risks to growth are tilted to the downside,” while “risks to inflation are tilted to the upside,” adding that the Middle East conflict is “a major source of uncertainty.”

With tensions in the Middle East escalating again and triggering a strong rebound in Oil prices, inflation could accelerate after easing in June, keeping the prospect of another ECB rate hike on the table. Traders are now fully pricing in a rate increase at the September meeting.

Meanwhile, markets have also increased their bets on a Bank of England (BoE) rate hike as inflation pressures persist. However, the British Pound is drawing little support as markets focus on the evolving political backdrop under the new Prime Minister and uncertainty surrounding the government’s fiscal plans.

Commerzbank strategist Michael Pfister argues that Banxico’s recent rate cuts were broadly justified by moderating inflation and Mexico’s weakening economy, leaving little reason for the central bank to tighten policy despite markets pricing in roughly three rate hikes. Although the eventual removal of those expectations could weigh on the peso, Pfister expects weaker US Dollar conditions, robust US growth and resilient Mexican exports to provide offsetting support. Commerzbank has therefore revised its USD/MXN forecasts slightly lower across the forecast horizon.

Banxico caution and US support for MXN

"In the months following the outbreak of war in Iran, the peso suffered due to Mexican monetary policy. This has changed and the market is now pricing in interest rate hikes. What is being overlooked, though, is that the conditions for monetary tightening are not in place."

"But the market now seems convinced that Banxico will soon tighten its monetary policy. Roughly three interest rate hikes of 25 basis points are priced in over the next twelve months, and at times the market has priced in significantly more."

"Neither the current inflation figures nor the struggling real economy provide grounds for a change in monetary policy. Instead, Banxico is likely to keep interest rates unchanged for the foreseeable future."

"Help for the peso could, however, come from the US. The market is currently anticipating a few basis points of interest rate hikes by the Fed. We consider this to be unjustified, given the political pressure for interest rate cuts."

"Pricing out these expectations is therefore likely to lead to a weaker USD and consequently lower USD/MXN exchange rates. We have therefore revised our USD/MXN forecast downwards across the entire forecast horizon."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

Christine Lagarde, President of the European Central Bank (ECB), explains the ECB's decision to leave key rates unchanged at the July policy meeting and responds to questions from the press.

ECB press conference highlights

"Recent data points to some improvement in economic activity."

"Firms, households expect labour market to remain weaker than before conflict."

"Indicators suggest economic activity will remain modest."

"Energy shock feeding into higher prices."

"Firms expect to raise selling prices."

"Underlying inflation contained, full effect yet to play out."

"Surveys indicate moderate wage growth."

"Rising labour productivity helps contain unit labour cost growth."

"Most measures of longer-term inflation expectations stand at around 2%."

"Energy inflation likely to keep inflation well above target into first half of 2027."

"Inflation will then decline."

"Conflict a major source of uncertainty."

"Risks to growth tilted to downside."

"Higher energy prices will weigh on real incomes."

"Risks to inflation tilted to upside."

"Energy shock could intensify further."

"Longer energy prices stay high, the likely to have second round impacts."

"Extreme weather events, climate crisis could drive up food prices."

"Have had some relatively benign developments since June decision."

"Post-MOU drop in Brent crude was quicker than anticipated."

"Studied density, durability, propagation of supply shock."

"Decision was unanimous."

"There were some who asked whether we should consider a hike."

"Positioned adequately to wait."

"Will receive long list of fresh data before September meeting."

"Particularly attentive to any risk of second round effects."

"Decision was unanimous."

"There were some who asked whether we should consider a hike."

"Positioned adequately to wait."

"Will receive long list of fresh data before September meeting."

"Particularly attentive to any risk of second round effects."

"Not seeing second round effects yet."

"Gradual decline in wages still happening."

"Not giving any forward guidance."

This section below was published at 12:15 GMT to cover the European Central Bank's (ECB) policy announcements and the initial market reaction.

The European Central Bank (ECB) announced on Thursday that it left key rates unchanged following the July policy meeting, as expected. With this decision, the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility stood at 2.4%, 2.65% and 2.25%, respectively.

ECB policy statement key takeaways

"Outlook for energy prices, while highly volatile, currently stands close to baseline of June Eurosystem staff projections and well above levels recorded prior to conflict in Middle East."

"Uncertainty remains high and full inflationary impact of energy shock has yet to play out."

"With today’s decision, ECB remains well positioned to navigate uncertainty caused by conflict."

"Will follow a data-dependent and meeting-by-meeting approach to determining appropriate monetary policy stance."

"In particular, ECB’s interest rate decisions will be based on its assessment of inflation outlook and risks surrounding it, in light of incoming economic and financial data, as well as dynamics of underlying inflation and strength of monetary policy transmission."

"ECB is not pre-committing to a particular rate path."

"APP and Pandemic Emergency Purchase Programme (PEPP) APP and PEPP portfolios are declining at a measured and predictable pace, as eurosystem no longer reinvests principal payments from maturing securities."

"ECB stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at its 2% target in medium term and to preserve smooth functioning of monetary policy transmission."

Market reaction to ECB policy decisions

EUR/USD remains under modest bearish pressure and was last seen losing 0.23% on the day at 1.1385.

This section below was published as a preview of the European Central Bank's (ECB) monetary policy decisions at 08:00 GMT.

• The European Central Bank is expected to hold key interest rates steady on Thursday, following a June hike.  
• All eyes will be on ECB President Lagarde’s words amid cooling inflation, weaker growth and a pullback in Oil prices.
• The Euro faces two-way risks heading into the ECB policy announcements.

The European Central Bank (ECB) is expected to hold the interest rate on the main refinancing operations and the deposit facility steady at 2.4% and 2.25%, respectively. The decision will be announced on Thursday at 12:15 GMT.

Unlike in June, the interest rate decision will not be accompanied by the staff’s updated economic projections this time, but will be followed by ECB President Christine Lagarde’s press conference at 12:45 GMT.

The Euro is set to rock on the ECB’s policy announcements, as traders will look for fresh cues on the central bank’s rate hike prospects.

What to expect from the ECB interest rate decision?

At last month's monetary policy meeting, the ECB changed course and hiked rates by 25 basis points (bps) in response to the energy shock triggered by the Middle East war.

Meanwhile, the ECB said in its June meeting Accounts, which were released earlier this month, that "communication should remain neutral, neither suggesting that the current decision was the first of ⁠a sequence of hikes to come nor that ​it was a one-off move.” This suggested that policymakers agreed to keep their options open to respond to different scenarios in the US-Iran conflict.

Since the June meeting, inflation has cooled more than expected, helped by lower energy prices and easing underlying price pressures. The Eurozone’s core Harmonised Index of Consumer Prices (HICP) rose by 0.2% month on month in June, softening from 0.3% in the prior reading. 

A brief de-escalation of Middle East tensions pulled Oil prices back to pre-war levels. Easing inflationary concerns could give the ECB some room to pause its rate path and wait for September’s updated staff projections before deciding on a potential hike.

However, natural gas and refined fuel prices remain elevated, while inflation expectations are still projected to stay above the ECB's 2% target through 2027. Additionally, the renewed outbreak of hostilities in the Middle East seen so far this month has revived the Oil price uptrend and inflation fears.

At the same time, the Eurozone economy is losing momentum. Growth is slowing and business activity remains weak amid worsening labor market conditions. The bloc’s economy contracted by 0.2% in the first quarter of 2026, compared with the estimated 0.1% growth expected.

These concerning factors could throw the ECB into a dilemma between supporting growth and containing elevated inflation.

President Lagarde, therefore, could stick to the ECB's meeting-by-meeting and data-dependent approach on Thursday, keeping the door open to another rate hike in September but with a non-committal stance.

How could the ECB meeting impact EUR/USD?

The Euro holds near 1.1400 against the US Dollar (USD) after correcting from the monthly high of 1.1482 hit on July 15 as traders brace for the ECB showdown, with the tone of the meeting likely to matter far more than the rate decision itself.

If Lagarde continues to emphasize upside inflation risks, keeps September rate hike expectations firmly on the table and signals that policy may need to remain restrictive for longer, markets could read this as a hawkish hold decision, providing near-term support to the Euro. That scenario could allow EUR/USD to retest the 1.1600 threshold, particularly if markets rebuild expectations for one final ECB rate hike in September.

Conversely, if the central bank’s president acknowledges slowing growth, softer inflation and a weakening labour market while sounding less confident about further tightening, traders could quickly scale back bets for a September rate hike. That would likely weigh on the Euro, dragging the pair back toward the 1.1350 region.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading EUR/USD following the monetary policy announcement.

“EUR/USD maintains a bearish near-term bias as the pair holds beneath a dense stack of moving averages. The 50-day simple moving average (SMA) at 1.1510 is the first cap, with the 100-day SMA at 1.1578 and the 200-day SMA at 1.1638 reinforcing a broader topside ceiling. The Relative Strength Index (14) sits below the neutral 50 line, hinting at lingering downside pressure rather than an immediate recovery.”

“On the downside, a break of the 1.1350 demand area would leave EUR/USD probing for new support below the 1.1300 round level,” Dhwani adds. 

Christine Lagarde, President of the European Central Bank (ECB), explains the ECB's decision to leave key rates unchanged at the July policy meeting and responds to questions from the press.

Key takeaways

"Decision was unanimous."

"There were some who asked whether we should consider a hike."

"Positioned adequately to wait."

"Will receive long list of fresh data before September meeting."

"Particularly attentive to any risk of second round effects."

"Not seeing second round effects yet."

"Gradual decline in wages still happening."

"Not giving any forward guidance."

Christine Lagarde, President of the European Central Bank (ECB), explains the ECB's decision to leave key rates unchanged at the July policy meeting and responds to questions from the press.

Key takeaways

"Risks to inflation tilted to upside."

"Energy shock could intensify further."

"Longer energy prices stay high, the likely to have second round impacts."

"Extreme weather events, climate crisis could drive up food prices."

"Have had some relatively benign developments since June decision."

"Post-MOU drop in Brent crude was quicker than anticipated."

"Studied density, durability, propagation of supply shock."

ING’s economists describe United Kingdom (UK) public finances as strained by rising spending pressures and high debt interest, despite ongoing fiscal consolidation via frozen tax thresholds and falling gilt issuance. They warn that potential policy shifts under Prime Minister Burnham, including changes to fiscal rules or tax allowances, could unsettle investors and re-focus attention on UK fiscal risks into the autumn budget.

Consolidation now, questions later

"Like much of Europe, there are plenty of reasons to be downbeat about the UK’s public finances. Spending pressures are growing – from defence to health and social care. Debt interest costs are high and rising, not helped by Britain’s large stock of index-linked bonds and increasing reliance on foreign investors (particularly hedge funds)."

"That said, the UK is also a rare example of a country undergoing some meaningful fiscal consolidation. Since 2021, the tax thresholds have been frozen in cash terms. And subsequent waves of inflation have dragged more and more people into higher tax brackets, increasing tax revenues as a share of GDP."

"Over recent weeks, investors had become more relaxed about Burnham’s appointment, following his commitment to stick to the existing fiscal rules. In theory, that precludes a stimulus package this autumn that would either materially increase gilt issuance or change the calculus for the BoE."

"But Burnham’s recent openness to bigger changes – including lifting the tax-free allowance and greater funding for social care – means a bolder budget can’t be ruled out. Investors will be particularly sensitive to any headlines on tweaks to the fiscal rules in the run-up to Burnham’s first budget this October or November."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

Christine Lagarde, President of the European Central Bank (ECB), explains the ECB's decision to leave key rates unchanged at the July policy meeting and responds to questions from the press.

Key takeaways

"Recent data points to some improvement in economic activitiy."

"Activity in services partly recovered."

"Digital services robust, partly on AI."

"Firms, households expect labour market to remain weaker than before conflict."

"Indicators suggest economic activity will remain modest."

"Energy shock feeding into higher prices."

"Firms expect to raise selling prices."

"Underlying inflation contained, full effect yet to play out."

"Survyes indicate moderate wage growth."

"Rising labour productivity helps contain unit labour cost growth."

"Most measures of longer-term inflation expectations stand at around 2%."

"Energy inflation likely to keep inflation well above target into first half of 2027."

"Inflation will then decline."

"Conflict a major source of uncertainty."

"Risks to growth tilted to downside."

"Higher energy prices will weigh on real incomes."

ECB flags persistent inflation risks despite modest recovery

The FXS Speechtracker score of 5.6/10, slightly above the historic 5.2/10 baseline, points to a mildly more impactful and cautiously hawkish tone. Lagarde acknowledges some improvement in economic activity and a partial recovery in services, with robust digital services partly driven by AI, but stresses that overall activity will remain modest and the labour market weaker than before the conflict, keeping growth risks tilted to the downside.

The hawkish tilt comes from repeated emphasis on the energy shock feeding into higher prices, firms planning to raise selling prices, and energy inflation likely to keep inflation well above target into the first half of 2027 before declining. While underlying inflation is described as contained and wage growth as moderate, rising labour productivity only partly offsets unit labour cost pressures, and longer-term inflation expectations around 2% suggest the Euro area remains anchored but vulnerable to prolonged energy-driven inflation, limiting scope for rapid policy easing.

The Japanese Yen (JPY) continues to trade at historic lows, with USD/JPY pressing past year-to-date highs above the 163.00 handle, as a renewed surge in global Oil and Natural Gas prices has dealt a severe blow to the net-energy-importing Japanese economy. 

While Japanese policymakers face an increasingly tough backdrop as global yields rise, speculation is mounting that the Bank of Japan (BoJ) could deliver an early rate hike to stem currency weakness. Institutional strategists remain divided on whether a single rate increase can reverse the Yen's slide or if a broader shift in Federal Reserve policy will be necessary to drive a lasting turnaround.

Energy shocks and rising yields create a challenging backdrop for Japan

According to MUFG, rising crude Oil and Natural Gas prices continue to exert heavy downward pressure on low-yielding currencies like the Yen. Verbal interventions from Finance Minister Satsuki Katayama have yielded minimal impact as markets gauge the likelihood of immediate currency intervention. 

While reports suggest BoJ officials are open to hiking rates faster than consensus, MUFG warns that domestic rate increases may not be enough on their own.

The Bloomberg report supports our forecast for the BoJ to hike rates as soon as in September. While rising yields in Japan would offer more support for the yen, we are not convinced another BoJ hike on its own will reverse the weakening trend.

Fundamentals and expected Fed moves point to a Yen recovery

Taking a longer-term approach, Commerzbank acknowledges that near-term headwinds have prolonged the Yen's weakness, prompting a slight upward revision to the bank's near-term USD/JPY trajectory. 

However, Commerzbank remains firm in its assessment that economic fundamentals will eventually prevail and drive a Yen recovery. The bank expects that Federal Reserve rate cuts next year will remove a major source of US Dollar strength, setting off a clear rally for the Yen.

We are therefore adjusting our forecast slightly upward (weaker yen), but we still expect the yen to appreciate by the end of next year (...) Next year, our economists also continue to anticipate interest rate cuts by the Fed. Such a development would certainly weigh on the US Dollar over the coming months.

Banks project near-term vulnerability followed by more favorable long-term trajectory

The banks project an environment of immediate vulnerability for the Japanese Yen followed by potential relief further out. MUFG cautions that as long as global energy prices remain elevated and yields outside Japan stay high, USD/JPY will remain pinned near YTD highs, with a September BoJ hike serving as a supportive measure rather than a total trend reversal. Meanwhile, Commerzbank maintains a constructive multi-quarter outlook, predicting that a turnaround in sentiment and eventual US monetary easing will drive USD/JPY down toward 145.00 over the medium term.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

BNY's Geoff Yu highlights that Brent has surged into the high $90s as Houthi attacks and U.S.-Iran escalation raise disruption risks around the Strait of Hormuz and Red Sea. Bond markets are treating this as an inflation shock, with higher yields and tighter financial conditions. Yu warns that Oil near $100 combined with rising yields is a stagflationary, risk-dampening mix.

Brent surge seen as inflation shock

"A Houthi spokesman said the group had targeted two oil tankers in the Red Sea. This widens the Iran conflict into a key shipping corridor just as the Red Sea becomes a workaround for crude exports disrupted by tensions around the Strait of Hormuz. The reported tanker strike off the coast of Saudi Arabia pushed Brent above $96/barrel, adding to concerns that the war is moving from regional military escalation into a broader energy and inflation shock."

"Renewed U.S.-Iran escalation and Houthi attacks have revived disruption risk around the Strait of Hormuz and the Red Sea. Bond markets are treating this as an inflation shock rather than a conventional risk-off event. Treasury, Bund and gilt yields are rising as investors price in a more persistent energy shock and put additional tightening back into global curves."

"Oil is tightening financial conditions before central banks have resolved the trade-off between inflation and growth. Asia can still trade the technology cycle, but Europe is absorbing the energy and rates shock."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• USD/CAD rebounds as the US Dollar regains momentum.
• Higher Oil prices provide only limited support for the Canadian Dollar.
• Canadian Retail Sales meet forecasts, while sales excluding autos fall short of expectations.

USD/CAD rebounds on Thursday as the US Dollar (USD) regains momentum amid rising tensions in the Middle East and growing Federal Reserve (Fed) rate hike bets, while traders show a muted reaction to Canadian Retail Sales data. At the time of writing, the pair trades around 1.4088, recovering from an intraday low of 1.4056.

Retail Sales rose 1.0% MoM in May, matching expectations and accelerating from a 0.4% increase in April. Retail Sales excluding autos climbed 1.2%, below the 1.4% forecast, after remaining flat in the previous month.

The United States and Iran exchanged attacks for a twelfth consecutive day, while supply disruptions around the Strait of Hormuz spread to the Bab el-Mandeb Strait. The threat to two major shipping routes pushed Oil prices higher, adding to global inflation concerns. West Texas Intermediate (WTI) crude trades near $89.90 per barrel, its highest level since June 11.

Higher Oil prices typically benefit the Canadian Dollar, given Canada’s position as a major crude exporter. However, the Loonie is struggling to draw meaningful support as firm US Dollar demand and diverging monetary policy expectations outweigh the boost from Oil.

Markets now see a 78% chance of a Fed rate hike in September, up from 52% a week ago, according to the CME FedWatch Tool. The Fed is widely expected to leave interest rates unchanged at next week’s meeting, although traders still price in around a 32% chance of an immediate hike.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 101.30, rebounding from an intraday low of 100.94.

Meanwhile, the Bank of Canada (BoC) is expected to keep interest rates unchanged in the coming months, as core inflation stays close to the central bank’s 2% target.