Forex News

ING strategists Francesco Pesole and Frantisek Taborsky note that DXY-weighted short-term implied volatility has dropped to 2021 levels, despite geopolitical tensions and Federal Reserve risks. Pesole argues that AI-driven equity resilience is anchoring currencies and supporting carry trades. He sees upside risks for FX volatility and short-term Dollar gains, but still expects a weaker Dollar after summer if Middle East tensions ease and Oil declines.

FX vols compressed, risks skew higher

"DXY-weighted one-month implied volatility has broken below the 5.50 area that marked the January, May and June lows. Excluding the Christmas 2025 dip, it is now at its lowest level since 2021."

"That is remarkable given the serious military re-escalation between the US and Iran and the prospect of a new Federal Reserve tightening cycle. The explanation goes beyond the muted energy-market response to the July Gulf headlines. We suspect it primarily reflects how well contained volatility remained between March and May despite sizeable moves in both rates and commodity prices. Incidentally, AI-fuelled equity resilience still appears to be anchoring currencies and helping sustain a self-reinforcing low-volatility, carry-trade environment."

"At this stage, risks are clearly skewed to the upside for both FX volatility and the dollar. The longer oil prices only partially price a new supply shock, the greater the risk of non-linear rallies. But there is also a realistic path towards Middle East de-escalation, lower oil prices and more dovish flexibility at the front end of the USD curve."

"That would ultimately point to a weaker dollar across the board. This remains our baseline for after the summer, although we acknowledge that the near-term backdrop looks far less supportive for USD bears."

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

Rabobank’s Global Daily, titled “To govern is to choose”, discusses the UK’s political and macroeconomic backdrop as Labour’s Andy Burnham is set to become prime minister. The report highlights Brexit’s lingering drag on productivity, weak consumption growth, persistent inflation and high public debt. It argues Burnham must prioritise supply-side investment and difficult fiscal choices to alter the UK’s economic trajectory before the 2029 election.

Burnham faces supply-side investment dilemma

"The macroeconomic backdrop helps explain why this search keeps ending in disappointment. The UK's problem increasingly appears to be one of supply rather than demand. In our forecasts for 2024-29, consumption growth never exceeds a paltry 1.2% per year, while per capita spending is broadly flat."

"This leaves Burnham facing a dilemma that has trapped much of British politics over the past decade. He inherits high public debt, elevated borrowing costs and weak growth, while demands on the state continue to rise from defence, net-zero and an ageing population. At the same time, investors are increasingly reluctant to finance ever-higher levels of current spending, fearing persistent inflation."

"If Burnham wants to change the UK's economic trajectory in the run-up to the 2029 election, he will have to focus on expanding supply sooner than later."

"The problem is that expanding supply requires investment long before it delivers results. The UK needs more electricity generation and grid capacity if it wants to electrify industry, housing and transport. It needs more housing, infrastructure and business investment, which means overcoming planning constraints and local opposition."

"Markets welcomed this week the absence of a sharp turn to the left, but that alone does not solve the underlying growth problem. A supply-side agenda requires money, political capital, and time. Money remains scarce, with gilt yields near 5%."

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

TD Securities strategists expect the European Central Bank (ECB) to keep the deposit rate at 2.25% in July after June’s hike, with September remaining a live meeting. They highlight weaker Euro area growth, easing inflation versus projections, and continued data-dependent guidance, suggesting limited near-term impact on EUR/USD from this week’s decision.

Muted reaction expected to July ECB

"After hiking in June, we expect the ECB to leave policy on hold. A September hike is likely to be left on the cards in the press conference, but with little concrete guidance."

"We expect the ECB to leave the deposit rate unchanged at 2.25%, following June's 25bps increase - its first rate hike since 2023. At the previous meeting, policymakers faced a combination of elevated energy prices, rising inflation expectations and staff projections that showed inflation remaining above target at the end of the forecast horizon."

"President Lagarde is likely to reiterate a measured approach in her press conference and suggest that the economic backdrop is now tracking between the Base and Milder scenarios. However, once again, the validity of that looking ahead will be determined by the duration and intensity of the resumed Middle East conflict."

"Base Case (75%) The deposit rate is kept at 2.25% and the statement replays the last several meetings' top hits of "following a data-dependent and meeting-by-meeting approach" and "not pre-committing to a particular rate path". There is little guidance for future meetings, instead predicating impacts and monetary policy reactions on the duration of the Middle East conflict and the energy shock."

"We therefore continue to see scope for one additional hike in September. That would take the deposit rate modestly above our estimate of neutral at 2.25%, moving policy to what we view as the upper bound of the neutral rate range of 2.00% to 2.50%."

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

• USD/CAD remains under pressure, heading for a second consecutive weekly loss.
• Surging Crude Oil prices boost the commodity-linked Canadian Dollar.
• Hawkish Federal Reserve expectations help limit the US Dollar's downside.

USD/CAD trades under pressure on Friday as the Canadian Dollar (CAD) benefits from higher Oil prices, offsetting the US Dollar’s (USD) recovery. At the time of writing, the pair trades around 1.4022, near a one-month low.

The pair is heading for a second consecutive weekly loss, with Oil prices up nearly 12% this week as intensifying fighting between the United States (US) and Iran disrupts energy shipments through the Strait of Hormuz. As Canada is a major Crude Oil exporter, higher prices tend to support the Loonie.

Higher energy prices are also reviving inflation concerns and complicating the monetary policy outlook for major central banks. Earlier this week, the Bank of Canada (BoC) left its policy rate unchanged at 2.25%, raised its 2026 inflation projection to 2.5% from 2.3%, and expects inflation to return to its 2% target by early 2027.

However, the BoC adopted a more balanced tone and removed the two-way policy guidance introduced in April. That guidance had suggested that new US trade restrictions on Canada could warrant interest rate cuts, while persistently high energy prices could require “consecutive increases in the policy rate.”

Across the border, softer-than-expected US inflation data released earlier this week initially pushed the US Dollar lower as traders trimmed bets on a near-term Federal Reserve (Fed) interest rate hike.

However, the Greenback's pullback proved short-lived as higher Oil prices fueled concerns that inflation could reaccelerate, supporting expectations of a Fed rate hike later this year.

Escalating geopolitical tensions and hawkish Fed expectations should keep the US Dollar well supported. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 100.83 after hitting a more than three-week low of 100.35 on Wednesday.

• Andy Burnham says he wants to lead a pro-business Labour Party.
• The new Labour leader promises a cabinet that reflects every wing of the party.
• Burnham argues that stronger public control over the cost of essentials is needed to keep inflation under control.

UK Labour leader Andy Burnham said on Friday that he intends to lead a pro-business Labour Party, arguing that his experience working with businesses as Mayor of Greater Manchester will serve as the model for his future government, according to Reuters.

In his first remarks as party leader, Burnham stressed the importance of keeping Labour united, saying the party will not defeat the right if it remains divided by internal infighting. He also said he would not suspend or punish Labour members for holding views that differ from his own.

Burnham added that he has not yet decided on the composition of his cabinet, but said it would reflect all parts of the Labour Party. He also called for a less toxic political discourse and said Labour would not try to outflank the Reform Party on its own political ground.

On the economic front, Burnham argued that insufficient public control over the cost of essential goods makes it harder to control inflation. The comments reflect his intention to combine a pro-business approach with greater public intervention in sectors considered strategic. Reuters reported that Burnham presented his experience of working with businesses in Greater Manchester as the blueprint for his future government.

Market reaction

The British Pound (GBP) remained largely unmoved by the remarks, with GBP/USD trading around 1.3430 at the time of press, up 0.35% on the day.

ING strategist Francesco Pesole notes that the recent GBP rally has stalled and EUR/GBP has rebounded from an important break lower. At 0.850, the cross remains around 1.5% undervalued versus ING’s short-term fair value model. With aggressive market pricing for Bank of England tightening and political change in the UK, Pesole expects EUR/GBP to return towards 0.870 by end-summer.

ING expects EUR/GBP to rise as sterling remains overvalued

"EUR/GBP has rebounded after an extended run of an important break lower. Still, at 0.850, it remains around 1.5% undervalued according to our short-term fair value model."

"As discussed recently, positioning adjustments and carry trade attractiveness likely played an important role in driving GBP strength. But approaching a change in government (Andy Burnham becomes UK Prime Minister next week) with short-term overvaluation is a risk for the pound."

"Incidentally, we still see plenty of downside risk for front-end GBP rates. Market pricing for 35bp of tightening by year-end looks way too aggressive. Our call remains a hold. We still expect a return to 0.870 in EUR/GBP by the end of the summer."

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