Good morning. Foreign exchange markets are enjoying a quiet, range-bound session, with most currencies little changed against the dollar amid a lack of first-tier economic data and a paucity of geopolitical catalysts. Treasury yields are inching lower, equity futures are pointing to a modest drop in the Nasdaq at the open, and all of the major currency pairs are less than 0.1% off yesterday’s close.

Oil markets are refusing to rally. Brent and West Texas Intermediate prices are holding near five-month lows even after a fully-laden Qatar-owned LNG carrier was struck by a projectile near the Omani coast while exiting the Strait of Hormuz overnight, suggesting that supply-side dynamics are now playing a dominant role in driving price action. Export volumes from Saudi Arabia and the United Arab Emirates are now reportedly nearing pre-war levels, and the OPEC+ group of countries yesterday approved a quota increase beginning in August, reinforcing expectations for a normalisation in global demand and supply conditions by the autumn.

The US economy continues to display resilience, and price pressures appear to be moderating. According to an update published yesterday, the Institute for Supply Management’s services-sector index—which covers roughly two-thirds of economic activity—decelerated slightly in June, registering 54.0, down half a point from May and marginally below the 54.2 forecast, but still comfortably in expansion territory for a 24th consecutive month. Business activity and new orders both cooled, falling to 55.4 and 55.1 respectively from elevated readings in May. The more encouraging signals came beneath the headline, with employment expanding for the first time in four months, posting its largest gain since 2024, while the prices index eased below 70 for the first time since February.

But Federal Reserve Governor Christopher Waller has turned more hawkish, suggesting that inflation now poses a greater threat to the central bank’s dual mandate than employment. Speaking at a Bank of Italy conference yesterday, Waller said “A year ago I was advocating for rate cuts because the labour market was not looking good,” but the “risks have completely flipped around now,” with the labour market stabilizing and inflation taking off, “So then that changes how you might want to think about policy”. Traders are putting 45% odds on a hike by September and have one move fully priced in by year-end.

Markets are overwhelmingly bullish on the dollar. Holiday-delayed data released yesterday showed non-commercial participants had built the largest net long position in dollar futures since 2015 as of last Tuesday, with short bets stacked against every other major currency. After many years of watching this pattern, we would suggest that hedgers should see this as a contrarian signal. When positioning becomes this unbalanced, the risk of a violent short squeeze and a counter-trend move in spot markets rises sharply—not necessarily because the fundamentals have changed, but because there is no one left to take the other side.

The Canadian dollar remains on the defensive after two surveys showed businesses and consumers remaining extremely cautious in early May amid ongoing trade uncertainties and the energy-price shock. The Bank of Canada’s second-quarter Business Outlook Survey showed sentiment deteriorating after three quarters of improvement, with firms reporting softer sales projections and a sharp rise in input costs. The companion consumer survey found a growing share of respondents expecting inflation to exceed 3% over the next 12 months, with medium-term expectations edging up and mentions of energy prices rising sharply. Both surveys were fielded before the mid-June signing of the US-Iran memorandum of understanding—meaning they probably overstate the prevailing negativity—but will nonetheless reinforce the case for keeping interest rates on hold.

Beyond this morning’s trade balance numbers from the US and Canada, there are no important economic releases scheduled for today, but traders will be on their toes as geopolitical risks loom.

In France, judges will deliver a verdict this morning on Marine Le Pen’s appeal against an embezzlement conviction and five-year ban on holding public office—a ban that knocked her out of the race to succeed President Macron when his term ends next year. A successful appeal would reopen the question of a Le Pen presidency, potentially widening the risk discount on euro-area assets as investors reassess the bloc’s fiscal trajectory. If the court upholds the judgment, her more centrist protégé Jordan Bardella is expected to stand as the National Rally’s candidate instead—a prospect markets would greet with considerably less anxiety. French government bond yields have risen in line with their European counterparts over the past 18 months, with little sign of stress for now—but this morning’s ruling could change that.

President Trump is attending a NATO summit in Ankara today and tomorrow, where he is expected to press allies on defence spending, burden-sharing and their reluctance to support the US campaign in the Middle East. The president has berated several member states for declining to make military bases available for strikes on Iran, for failing to assist in reopening the Strait of Hormuz, and for falling short of his demand that allies raise defence spending to 5% of gross domestic product—a target he has set despite all members now meeting the alliance’s existing 2% threshold for the first time*. Currency markets could move along a spectrum of outcomes, with a conciliatory tone easing fiscal-policy fears in Europe and supporting the euro, while a more aggressive posture—particularly one that calls into question American security commitments—widening risk premia on European assets and driving capital toward the dollar. The likeliest outcome is somewhere between the two: sharp rhetoric that generates headlines yet produces no structural break, much as previous summits have done—but if recent events have taught us anything, it is that the unexpected tends to occur more often than expected.

*The US spends roughly 3.3% of GDP on its military, amounting to more than all other NATO members combined**.

**The Defence Department did not make an appearance on the pitch in last night’s World Cup game.