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Scotiabank strategists Shaun Osborne and Eric Theoret highlight the Euro (EUR) trading quietly against the US Dollar (USD) in a tight low-1.14 range, with limited reaction to stronger ZEW sentiment data. Short-term rates have stabilized after a hawkish repricing, supporting EUR via yield spreads. Markets expect little change from the July European Central Bank (ECB) meeting, focusing instead on September tightening and watching resistance near 1.1500.

Euro holds tight pre-ECB decision

"The EUR remains quiet as it continues to consolidate within a remarkably tight range in the low-1.14s, entering Tuesday’s NA session with a fractional 0.1% gain vs. the USD."

"Broader developments appear to be offering little in terms of movement for the EUR, and we note the absence of any material reaction to the release of stronger than expected ZEW investor sentiment data – a leading indicator for German industrial production activity (by 12-18 months)."

"Short-term rates markets are showing signs of stabilization ahead of Thursday’s ECB decision, consolidating the recent hawkish repricing that has delivered fundamental support to the EUR via yield spreads."

"Markets are pricing little change for the July 23 decision, favoring September with 22bpts of tightening currently reflected in OIS with a cumulative 43bpts by December."

"Neutral – the EUR’s technicals are offering little in terms of momentum as the RSI shows signs of stabilization just below the neutral threshold at 50. Recent price action has been narrowly confined to a tight range roughly bound between 1.1380 and 1.1480, and we remain neutral absent a meaningful push toward 1.1500 and the 50 day MA at 1.1516."

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Brown Brothers Harriman’s (BBH) Elias Haddad highlights that the sell-off in gilts and British Pound (GBP) has stabilized after Prime Minister Andy Burnham appointed John Healey as Chancellor and pledged to stick to fiscal rules. However, fiscal policy details may not be known until the October budget, and Haddad expects this uncertainty, alongside ongoing labor market slack, to limit relief rallies in gilts and GBP and prompt dovish Bank of England (BoE) repricing.

Fiscal stance and labor slack weigh

"The sell-off in gilts and GBP stabilized after Prime Minister Andy Burnham picked John Healey – former Defense Secretary - as his Chancellor of the Exchequer. In parallel, Burnham stressed yesterday he will “stick to the fiscal rules…and use obviously any flexibility within them.”"

"Attention now turns to how Burnham plans to use that “flexibility” to fund spending. The details may not emerge until the October budget. Until then, we expect fiscal policy uncertainty to limit relief rallies in gilts and GBP."

"UK May labor market data was largely in line with consensus. The unemployment rate was unchanged at 4.9% for a second straight month in May and the vacancies-to-unemployment ratio remained stuck at 0.4, below its estimated equilibrium level of 0.50. That is indicative of ongoing labor market slack."

"The swaps curve price in a full 25bps BoE rate hike to 4.00% in November and a total of 60bps of tightening in the next twelve months. That would leave the policy rate above the BoE’s estimated neutral range (2.00%-4.00%)."

"Restrictive monetary policy when the UK economy is operating well below potential raises the likelihood of a downward adjustment to BoE rate expectations against GBP."

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Societe Generale strategists note that softer June inflation in Canada has stalled the Canadian Dollar’s (CAD) rebound from 1.4250 toward 1.40 against the US Dollar (USD). Failure to reclaim the 50-day moving average around 1.3991 and new US tariffs on Canadian goods complicate the mean-reversion. Technical levels at 1.3970 and 1.3870/1.3850 define downside, with 1.4150/1.4175 as interim resistance.

Tariffs weigh on Canadian Dollar outlook

"Headline CPI slowed to 2.8% yoy in June and core dipped to 1.8%, the lowest since Dec-20. For the BoC, this will reassure that spillovers to supply chains and non-energy goods from energy are contained. The bank last week estimated that CPI inflation would stay elevated in June and then ease gradually in the coming months, returning to around 2% in early 2027."

"In Canada, below forecast inflation data for June will reinforce the status quo of the BoC and brought a (temporary) halt to the rebound in the CAD from 1.4250 to 1.40/USD."

"The policy rate is judged to be appropriate. Money markets currently price just 18bp of tightening in six months, in line with the RBA but well below the ECB (+45bp), Fed (+42bp) and BoE (+41bp)."

"Technically, the failure to reclaim the 50dma at 1.3991 does not have to be the end of the mean-reversion since the end of June but raises the bar especially after the US imposed new 50% tariffs on $20bn worth of Canadian goods. The 2y UST/GCAN spread widened again by 6bp to 136bp, having tightened previously from 142bp."

"Technically, the violation of 1.3970 would open a return to May lows around 1.3870/1.3850. Last week's high at 1.4150/1.4175 is interim resistance."

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ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner note that the Dollar is drawing broad-based support as markets slowly react to escalating tensions in the Gulf. They argue USD still has room to rally, with risks skewed higher as investors remain complacent about military developments and elevated Oil prices. A return of DXY towards 101.50 is seen as consistent with current conditions.

Dollar benefits from Gulf tensions

"The FX market is gradually catching up with developments in the Gulf, where tensions still appear to be escalating, and the dollar has found broad-based support. US President Donald Trump has pledged retaliation against Iran following the killing of three US service members in Jordan, while Houthi militants are threatening a blockade of Saudi Arabia in the Red Sea."

"Brent has reached $90, still well below the spring highs, but FX markets may now be reacting less to the risk of sharp short-term spikes and more to the prospect of oil prices remaining elevated for longer. The bond sell-off and the spillover into equities reflect that shift."

"Dollar risks remain skewed to the upside today as markets continue to display a risky degree of complacency towards the military re-escalation. A move back to 101.50 in DXY looks entirely consistent with the current backdrop."

"The US calendar is light today, and the Federal Reserve remains in its pre-meeting blackout period."

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• USD/CAD gains as Middle East tensions boost demand for the US Dollar.
• Renewed US tariffs and softer Canadian inflation weigh on the Canadian Dollar.
• Higher Oil prices may cushion the Canadian Dollar and limit further USD/CAD upside.

USD/CAD trades on the front foot as tensions in the Middle East keep the US Dollar (USD) firmly bid, while the Canadian Dollar also faces pressure from renewed trade frictions with the United States.

At the time of writing, the pair trades around 1.4084, extending its gains for a second straight day.

US President Donald Trump announced a 50% tariff on nearly $20 billion worth of Canadian imports, equivalent to around 0.85% of Canada’s Gross Domestic Product (GDP). The tariffs are scheduled to take effect on August 19.

Canadian Prime Minister Mark Carney described the tariffs as a “direct violation” of the USMCA. However, he added that Ottawa remains committed to negotiations.

Meanwhile, softer-than-expected Canadian inflation data released on Tuesday supports the Bank of Canada’s (BoC) steady policy stance. Easing price pressure reduces the need for an interest rate hike, adding to the near-term headwinds for the Canadian Dollar.

On the geopolitical front, the US military carried out a tenth consecutive night of strikes against Iran on Monday, while Iran’s Revolutionary Guards targeted US military assets across the region.

Against this backdrop, the US Dollar continues to attract safe-haven demand, while Oil prices extend their rebound to the highest level in more than a month. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.10, extending its gains for a fourth consecutive day.

West Texas Intermediate (WTI) trades around $84.32 per barrel, up nearly 2.5% on the day. Higher Oil prices could lend support to the commodity-linked Canadian Dollar and limit the upside in USD/CAD.

Even so, diplomatic channels remain open. The Associated Press reported that Iranian officials began meeting with mediators in Pakistan on Tuesday. Reuters reported on Monday that mediators had offered Tehran a 10-day ceasefire aimed at bringing last month’s interim agreement back on track.

BNY’s Geoff Yu highlights Japan’s new fiscal guidelines under Prime Minister Takaichi, which prioritize proactive spending and long-term investment over near-term consolidation. The plan targets large public-private outlays and abandons the single-year primary surplus goal, while GPIF and insurers increase domestic and super-long JGB exposure, influencing USD/JPY and Japanese Yen (JPY) rate dynamics.

Proactive spending and JGB demand in focus

"Japan’s Cabinet approved its first economic and fiscal policy guidelines under Prime Minister Sanae Takaichi, marking a clear shift toward aggressive, strategic fiscal spending with no explicit call for fiscal consolidation. The blueprint treats the next fiscal year from April as the first year of “responsible and proactive” spending and targets ¥370tn of combined public-private investment by fiscal 2040, with a focus on 17 areas, especially semiconductors."

"It also introduces a new budget allotment from fiscal 2027 and ends the traditional push for a single-year primary surplus, instead seeking to steadily lower the debt-to-GDP ratio over time. The government aims for real growth above 1% and nominal growth above 3% and plans to decide on a possible food tax cut by early August. It reiterated that monetary policy remains the Bank of Japan’s (BoJ) responsibility."

"Japanese insurers bought the most super-long JGBs in three years in June, signaling that demand from a key buyer is stabilizing as yields look more attractive. Life and casualty insurers bought a net ¥630.5bn of JGBs with maturities over 10 years, the largest amount since July 2023."

"The move suggests some investors are warming again to long-dated debt after yields peaked in mid-May. The report also notes policy support, including a proposal to add government bonds to a tax-free investment program and Takaichi’s comments encouraging the GPIF to raise investment in Japanese financial assets. Meanwhile, overseas investors sold the most 2y and 5y notes since December 2022, as demand weakened after the BOJ raised rates in mid-June and signaled further hikes if the economy warrants."

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• New Zealand inflation accelerated more than expected in the second quarter, reinforcing expectations of further RBNZ rate hikes.
• Markets now expect several additional tightening moves from the central bank over the coming months.
• The US Dollar remains supported by safe-haven demand amid Middle East tensions, limiting the Kiwi's upside.

NZD/USD trades around 0.5835 on Tuesday at the time of writing, down a modest 0.07% on the day despite support for the New Zealand Dollar (NZD) from stronger-than-expected inflation data.

Data released by Statistics New Zealand showed that the Consumer Price Index (CPI) rose 1.5% QoQ in the second quarter, up from 0.9% in the previous quarter and above market expectations of 1.4%. On an annual basis, inflation accelerated to 4.1% YoY from 3.1%, beating the market consensus of 4% and reaching its highest level since December 2023.

The data strengthened expectations that the Reserve Bank of New Zealand (RBNZ) will continue tightening monetary policy. After raising the Official Cash Rate by 25 basis points to 2.5% at its July meeting, the central bank indicated that further rate increases were likely at upcoming meetings. According to Bloomberg, markets now expect another hike in either October or December, followed by an additional increase in February 2027.

NZD support builds as RBNZ hawkishness meets persistent inflation risks

Analysts at BBH argue that “above target inflation and a more favorable domestic growth outlook” continue to “argue for additional RBNZ rate hikes which is NZD supportive.” They note that at its last July 8 meeting, the RBNZ raised the Official Cash Rate 25 bps to 2.50% and indicated that “further OCR increases appear likely at upcoming meetings.” Echoing that hawkish bias, TD Securities warns that “upside risk to inflation remains given renewed Middle East tensions pushing Brent above $90,” and expects the central bank to “hike again in September, after it restarted its hiking cycle in July.”

However, the Kiwi's gains remain limited by the resilience of the US Dollar. Persistent tensions in the Middle East continue to support demand for safe-haven assets as the United States (US) maintains its military strikes against Iran and military exchanges continue across the region, even as diplomatic efforts remain underway.

In the United States, recent economic data continue to reinforce expectations of a more accommodative stance from the Federal Reserve (Fed). Fed funds futures are pricing an 84.5% chance that the central bank will leave interest rates unchanged at its July 29 meeting, up from 61.5% one month ago, according to the CME FedWatch Tool. Meanwhile, the four-week average of the ADP Employment Change showed that US private employers added just 16.5K jobs per week in early July, highlighting a gradual slowdown in labor market momentum.

Rabobank's Senior FX Strategist Jane Foley discusses United Kingdom (UK) markets’ reaction to PM Burnham’s new cabinet and fiscal plans, noting 10-year gilt yields above 5% and British Pound (GBP) weakness in G10. Foley highlights uncertainty over funding Burnham’s agenda, the UK’s low savings ratio and large current account deficit, and argues that UK debt markets are particularly sensitive to perceived negative news.

Burnham agenda unsettles UK assets

"UK markets have now had a few hours to react to PM Burnham’s new cabinet, many of whom have been involved in UK politics for years. 10-year gilt yields are currently above the 5% level, which is a sign of some anxiety. Similarly, the pound is the worst performing G10 currency on a 1-day view."

"However, it is still uncertain as to how Burnham plans to fund his agenda. Later this year, Burnham will announce his 10-year plan. Yesterday he commented that he will use ‘flexibility’ within the fiscal rules."

"In the short-term, Burnham has promised measures to ease cost-of-living pressures. He kicked this off this morning with the news that VAT on household electricity bills will be cut from October. The market is now bracing itself for a list of further announcements."

"The UK has a low savings ratio and a large current account deficit. These metrics can increase the sensitivities of its debt market to perceived bad news. The UK may not have the largest debt/GDP ratio in the developed world, but arguably it has one of the most sensitive debt markets."

"Given the jittery reaction in gilts and the pound to Burnham’s early announcements, his honeymoon period could be short-lived. We look for EUR/GBP to push higher to 0.8650 on a 3-month view. We see scope for dips in cable back to the GBP/USD 1.32 area on a 3-month view."

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Scotiabank strategists Shaun Osborne and Eric Theoret note the Canadian Dollar (CAD) has recovered overnight losses versus the US Dollar (USD) after news that President Trump may impose new tariffs on Canadian exports. They see these measures as an additional headwind for CAD, with fair value for USD/CAD nudging higher and short-term gains in the Canadian Dollar likely capped.

Tariff threat keeps CAD restrained

"President Trump is threatening 50% tariffs on some Canadian exports in response to “unfair treatment” of US autos, dairy and alcohol. The tariffs will become effective in 30-days—giving time for an off ramp to be found perhaps—and might hit some 5% of Canadian exports into the US, early estimates suggest."

"The CAD is opening up modestly higher against the generally softer USD after reversing losses seen overnight on news that the US is poised to impose more tariffs on Canadian exports."

"The CAD has largely taken the news its stride but it is another minor headwind to add to all the other trade-related drags that will keep the currency trading on the back foot, all else equal. Our fair value estimate for spot has nudged up to 1.4015 this morning."

"Neutral—The CAD’s latest stumble leaves spot trading right on the 40-day MA (1.4059). A solid rebound in the USD yesterday suggests the mild improvement in the CAD of late has found a short-term peak at least around the 1.40 point."

"The break under the USD May/June bull trend line remains intact, as do the CAD-supportive signals from the daily oscillators which prompts us to think that spot may not rise significantly—at least not yet. USD resistance remains 1.4125 and 1.4160/70."

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• Gold rebounds from the $4,000 area as markets monitor the latest US-Iran developments.
• Elevated Oil prices and the prospect of tighter Federal Reserve policy limit the metal’s upside.
• XAU/USD tests the Bollinger midline near $4,062, with the $4,175 upper band acting as the next resistance.

Gold (XAU/USD) edges higher on Tuesday as buying interest around the $4,000 psychological level supports prices, while traders assess developments in the Middle East and their potential economic fallout. At the time of writing, XAU/USD trades around $4,060, up 1.30% on the day.

The United States military carried out a tenth consecutive night of strikes against Iran on Monday, while Iran’s Revolutionary Guard targeted US military assets across the region.

Despite the continued military exchanges, diplomatic efforts are underway. The Associated Press reported that Iranian officials began meeting with mediators in Pakistan on Tuesday. Reuters reported on Monday that mediators had offered Tehran a 10-day ceasefire to try to bring last month’s interim agreement back on track.

With the situation still in flux, the US Dollar (USD) remains the preferred safe-haven asset, while Oil prices hold close to their highest level in more than a month. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is hovering around 101.00, little changed on the day.

Although Gold is attempting to establish a base above the $4,000 psychological level, its upside remains limited as elevated energy prices stoke inflation concerns and strengthen expectations that the Federal Reserve (Fed) will keep monetary policy tighter for longer or even raise interest rates.

Higher borrowing costs reduce Gold's appeal, prompting investors to rotate toward interest-bearing assets such as government bonds.

Dollar support builds as Gulf tensions weigh on Gold

Analysts at ING note that “the FX market is gradually catching up with developments in the Gulf, where tensions still appear to be escalating, and the Dollar has found broad-based support.” They highlight that US President Donald Trump has “pledged retaliation against Iran following the killing of three US service members in Jordan,” while Ansar Allah militants are “threatening a blockade of Saudi Arabia in the Red Sea,” reinforcing the bid for the US Dollar as geopolitical risks intensify.

Strategists at OCBC say Gold has "continued to consolidate around recent lows following the sharp pullback earlier this month," adding that "near term, price action may remain two-way, but a more sustained recovery likely requires [O]il prices to back off, some easing in real yields and Fed tightening expectations. Until then, upside may remain capped."

Technical analysis: XAU/USD stabilizes above $4,000

XAU/USD is testing the 20-day Simple Moving Average (SMA) at $4,061. The Relative Strength Index (RSI) at 45 on the daily chart is below the neutral 50 level, indicating weak bullish momentum. Meanwhile, the Average Directional Index (ADX) near 39 suggests the prevailing trend remains strong despite the near-term stabilization.

On the downside, immediate support lies at the $4,000 psychological level, followed by the lower Bollinger Band at $3,948. A break below this area could expose the horizontal support at $3,800.

On the topside, a sustained move above the Bollinger midline at $4,061 could open the door toward the upper band at $4,174, followed by the $4,200 resistance level. A decisive break above $4,200 would bring the more distant $4,500 barrier into focus.

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