Forex News

• Euro gains as August German IFO Business Climate beats expectations, rising to 88.8.
• Canadian Dollar weakens after US tariff escalation and the breakdown of trade talks.
• Subdued crude oil prices add further pressure to the commodity-linked CAD currency.

EUR/CAD extends its gains for the second consecutive day, trading around 1.6160 during the European hours on Tuesday. The currency cross remains stronger as the Euro (EUR) holds gains following the release of the German IFO business sentiment index data.

The Business Climate Index improved in August, rising to 88.8 from a revised 86.7 in July, outpacing market estimates of 87.2. Sub-indexes also demonstrated strength: the Current Assessment Index rose to 88.5, beating expectations of 87.0 and the prior 86.5 reading, while the Expectations Index jumped to 89.1, comfortably topping both July’s revised 86.8 figure and the forecast of 87.5.

Euro strength tightens conditions as ECB leans on anchored inflation expectations

Strategists at BNY stress that “inflation remains the core issue in Europe,” even as signs of improving activity emerge. They argue that “tightening too early would be a mistake,” noting that the ECB’s latest inflation survey shows expectations “are anchoring more firmly,” giving policymakers some leeway to wait and assess incoming data. At the same time, they highlight that the Euro is “near cyclical highs and already doing some of the tightening,” effectively contributing to a further tightening in financial conditions without the ECB having to move aggressively in the near term.

Meanwhile, the EUR/CAD cross appreciated as the Canadian Dollar (CAD) struggled under market caution stemming from collapsed US-Canada trade talks. Tension escalated after Canadian Prime Minister Mark Carney announced plans to match US tariffs dollar-for-dollar following Washington's implementation of 50% tariffs on select Canadian goods.

The commodity-linked Canadian Dollar faced additional pressure from a second consecutive day of subdued crude oil prices, with West Texas Intermediate (WTI) trading around $84.20 per barrel at the time of writing. Though crude prices saw slight support from intensified US economic pressure aimed at forcing the reopening of the Strait of Hormuz, the gains were capped. US Treasury Secretary Scott Bessent outlined plans to isolate Iran via secondary sanctions, while President Donald Trump warned foreign nations of a strict timeline to sever commercial ties with Tehran or risk unilateral US penalties.

Markets watch for escalation as Iran vows retaliation and leans on China

Analysts at Danske Bank note that Iran has "promised to retaliate against expanded US economic sanctions that the Americans said would cut off Iran's economic lifeline," underscoring the risk of a more confrontational trajectory. They add that Tehran is signalling it is not isolated, with officials "expressing confidence that major trading partners like China would resist Washington's pressure campaign," a stance that could shape how far and how fast the new sanctions regime can be enforced.

• GBP/JPY regains positive traction on Tuesday amid the prevailing JPY selling bias.
• Japan’s fiscal woes and the wide interest rate gap continue to weigh on the JPY.
• The supportive fundamental backdrop supports prospects for additional gains.

The GBP/JPY cross catches fresh bids on Tuesday and climbs to its highest level since July 30, around mid-217.00s during the first half of the European session. Moreover, the prevailing selling bias surrounding the Japanese Yen (JPY) backs the case for an extension of the recent well-established uptrend witnessed since the beginning of this month.

Investors remain worried over Japan's worsening fiscal condition due to surging long-term interest rates, a massive national debt burden, and expansionary budget pressures. Moreover, Japan's economy faces headwinds due to increased import costs amid supply chain strains as a result of the Middle East conflict and disruptions around the Strait of Hormuz. These have been key factors behind the JPY's underperformance and supporting the GBP/JPY cross.

Meanwhile, the Bank of Japan's (BoJ) benchmark interest rate, despite bets for a faster policy tightening, is projected to remain below 1.5% by the end of this year. On the other hand, the Bank of England (BoE) base rate is projected to finish 2026 unchanged at 3.75%, still leaving a wide gap of around 225-250 basis points (bps). This might continue to fuel the so-called JPY carry trade and validates the near-term positive outlook for the GBP/JPY cross.

The British Pound (GBP), on the other hand, remains on the back foot amid a broadly firmer US Dollar (USD) and does little to provide any meaningful impetus to the currency pair. Nevertheless, spot prices have reversed a significant portion of losses led by a rare US-Japan joint intervention in late July. Moreover, the fundamental backdrop backs the case for a further near-term appreciating move. Hence, any corrective pullback is likely to be bought into.

OCBC’s Sim Moh Siong and Christopher Wong highlight that renewed policy uncertainty and Federal Reserve (Fed) reaction risks are constraining US Dollar (USD) gains, even as higher US real yields and a resilient US economy limit downside. They stay neutral on the Dollar over the next one to two quarters, watching Fed credibility, Jackson Hole guidance and inflation-fighting commitment.

Dollar steadies as policy risks build

"Renewed policy uncertainty is constraining the scope for USD gains and puts our moderately constructive USD view over the next one to two quarters at risk."

"That said, rising real yields, driven by AI-related investment demand competing with heavy government borrowing, remain consistent with a resilient US economy."

"Even so, the economy remains firm enough to reduce the risk of an overly dovish Fed, which should help contain USD downside."

"For now, we prefer to stay neutral on the dollar rather than chase the latest bout of weakness."

"The USD could find support if Warsh and other Fed officials push back against emerging debasement concerns and reinforce their commitment to returning inflation to the Fed's 2% target."

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

United Overseas Bank’s (UOB) Quek Ser Leang and Lee Sue Ann describe GBP/USD price action as range-bound intraday between 1.3615 and 1.3660, with momentum indicators neutral. However, their 1–3 week view remains positive after turning bullish last week, looking for a move toward 1.3700 while keeping strong support at 1.3585. A break below that level would negate the upside scenario.

Range-bound now but bullish bias

"24-HOUR VIEW: After GBP closed little changed at 1.3644 (+0.09%) last Friday, we highlighted yesterday that “the price movements still appear to be part of a range-trading phase.” We expected GBP “to trade between 1.3620 and 1.3665.” Our view was not wrong, as GBP traded between 1.3621 and 1.3656 before closing at 1.3630 (-0.10%). There has been no shift in either downward or upward momentum, and GBP is likely to continue to trade in a range, probably between 1.3615 and 1.3660."

"1-3 WEEKS VIEW: We turned positive on GBP last Monday (17 Aug, spot at 1.3540). On Friday (21 Aug, spot at 1.3640), we indicated that GBP “could continue to rise to 1.3700.” There is no change in our view. On the downside, if GBP breaks below 1.3585 (no change in ‘strong support level), it will mean that 1.3700 is out of reach."

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

The German IFO Institute Business Climate Index improves again. The sentiment data arrives higher at 88.8 in August from 86.7 in July, revised higher from 86.6. The data also beats estimates of 87.2.

The IFO Current Assessment Index also comes in higher at 88.5, beating 87.0 estimates and the prior release of 86.5.

Expectations Index improves significantly to 89.1 from 86.8 in July, revised higher from 86.7. The data was already expected to arrive higher at 87.5.

Market reaction

No major reaction is seen in the Euro (EUR) following the German IFO data release. At press time, EUR/USD trades marginally lower to near 1.1660.

• The British Pound edges up against the US Dollar to near 1.3640 despite the US Dollar ticking higher.
• The BoE is unlikely to raise interest rates in the near term.
• Fresh US sanctions will likely boost US Treasury Yields.

The British Pound (GBP) trades marginally higher against the US Dollar (USD) at around 1.3640 during the European trading session on Tuesday, even as the US Dollar Index (DXY) edges up, indicating strength in the British currency.

At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades slightly higher to near 99.10.

The Pound Sterling gains despite market experts seeing the Bank of England (BoE) holding interest rates steady in the near term.

UK inflation surprise limited as BoE pricing eases

Analysts at Danske Bank note that UK inflation data for July were broadly in line with expectations, with headline CPI rising to "2.9% y/y (cons: 2.9%, prior: 2.6%), mainly driven by the 13% increase in the Ofgem energy price cap from 1 July." They highlight that "core inflation was slightly higher than expected at 2.6% y/y (cons: 2.5%, prior: 2.6%)," while "services eased in line with expectations to 3.4% y/y (cons: 3.4%, prior: 3.6%)." According to Danske, the combination of this inflation print and "yesterday's weak labour market data" has "taken the top off BoE pricing for the remainder of the year."

Meanwhile, the US Dollar trades higher against its other peers as investors fear that fresh United States (US) sanctions on Iran could lift oil prices higher and eventually US Treasury Yields.

GBP/USD Technical Analysis

GBP/USD trades at 1.3640, maintaining a bullish near-term bias, with price holding above the 20-day Exponential Moving Average (EMA) at 1.3531, which reinforces an underlying supportive structure after the recent advance.

The Relative Strength Index (14) near 69 suggests strong upside momentum, though it is flirting with overbought territory, hinting that gains could become more gradual if buyers pause ahead of fresh catalysts.

On the downside, immediate support is seen at the 20-day EMA around 1.3530, where a break would expose a deeper correction toward prior lows not visible in the current indicator set. As long as GBP/USD remains above this moving average, the broader constructive tone is likely to persist, with any shallow pullbacks viewed as corrective within the ongoing uptrend.

Strategists at Scotiabank describe the current technical backdrop for GBP/USD as "solidly bullish," noting that after a period of range trading and "two tests of 1.3150 (April and June)," the pair now appears better poised to advance. They argue that "a sustained push above 1.3650/60 implies potential for an extension towards the 1.41 zone over the balance of the year," underscoring their view that the underlying trend dynamics continue to favour further Pound appreciation.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

MUFG’s Derek Halpenny and Abdul-Ahad Lockhart highlight that Gold’s recent strength alongside USD weakness and higher US yields has not historically confirmed a debasement story. They find that in past episodes, Gold often corrected as DXY stabilised, but if US yields were to fall materially, history points to a regime where Gold rallies further and sustained Dollar softness becomes more likely.

Yield dynamics key for Gold outlook

Our analysis examines similar previous episodes of USD weakness, gold strength and rising Treasury yields testing whether subsequent market behaviour validates the debasement narrative. The historical evidence suggests it does not.

"Across prior episodes, extreme readings in the signal were not followed by persistent USD weakness. Instead, DXY typically stabilised, while gold frequently corrected over the subsequent one to three months."

"If that backdrop were to change and yields began falling materially, history points to a different regime."

"In previous episodes where USD weakness and gold strength coincided with declining yields, gold continued to rally and sustained USD softness became more likely."

"A move from rising to falling yields represents an important signal that the market is transitioning from a fiscal and term-premium story towards an easing-driven USD bearish environment."

"As long as yields remain elevated, the more likely outcome is dollar stabilisation, gold consolidation and selective outperformance in carry-sensitive FX rather than a sustained debasement."

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