Oil prices are easing and markets are rebounding after the United States and Iran paused military hostilities over the weekend—reportedly in part because American munitions stocks are running low. Brent crude is trading at $88 a barrel—down almost 12% from Friday’s levels as traders try to avoid being wrong-footed by yet another diplomatic reversal—Treasury yields are slipping, and futures on the S&P 500 and Nasdaq are pointing to a strong advance at the open.
The dollar is down against most of its major rivals as investors brace for an intense week. The Federal Reserve, Bank of England and Bank of Japan will all deliver rate decisions. The US will publish its latest monthly personal consumption expenditures data and second-quarter gross domestic product numbers, and the EU will update inflation data, while Meta, Microsoft, Amazon and Apple each report earnings. The euro, pound and yen are each sitting on incremental gains against the greenback, while the Canadian dollar is a modest outlier, underperforming slightly as the decline in crude prices strips away commodity support.
Uncertainty is extremely high ahead of Wednesday’s Federal Reserve meeting. Labour markets are showing no sign of softening—initial jobless claims fell to their lowest since 1969 last week—and the unemployment rate is sitting at 4.3%, effectively full employment. June’s inflation data brought some relief, with limited passthrough from higher energy prices, but a number of one-off factors may have flattered the reading, and the US-Iran conflict is showing little sign of ending, artificial-intelligence investment is bidding up prices across the supply chain, and the administration is still busy imposing tariffs on major trading partners. Investors are putting roughly one-in-three odds on a move—closer to a coin toss than any decision during Jerome Powell’s term as chair.
Thursday’s data are expected to show the US economy maintaining momentum amid easing inflation pressures, but the information will already be stale by the time it lands. The economic consensus points to annualised quarter-on-quarter growth of 2.1%, unchanged from the first quarter, with the June core personal consumption deflator—the Fed’s preferred inflation indicator—seen rising at a moderate 0.2% pace on a month-over-month basis. A hotter than anticipated print could anchor late-year monetary tightening expectations higher and lend the dollar some post-Fed support, while evidence of a more sustained deceleration in price momentum might have the opposite effect.
Across the Atlantic, the Bank of England is expected to remain on the sidelines. We anticipate a 6–3 vote in favour of holding rates, with a minority of monetary policy committee members pushing for a hike the data do not yet support. Growth and inflation have both come in softer than the Bank’s forecasts, and evidence of broader, demand-led inflationary pressure remains scant, giving policymakers room to wait for more clarity. The pound could move, however, if Governor Bailey and his colleagues express deepening concern over the direction of energy prices, which remain elevated even after the weekend’s declines; risks are therefore tilted to the upside.
The Bank of Japan is also likely to leave its policy settings untouched on Friday. With the economic outlook broadly evolving as expected, there appears to be little urgency for further adjustment, but traders will be watching for signs of a more hawkish turn after recent reports suggested officials may be willing to accelerate the normalisation process in the months ahead. A sustained fall in crude prices could deliver some relief on the currency front, but the yen remains vulnerable as rate differentials, fiscal concerns, and a steady decline in support for Sanae Takaichi’s government generate headwinds.
Earnings reports may rival central bank decisions for importance in currency markets. Wealth effects from the technology sector’s gains have almost certainly played a major role in sustaining US household consumption this year, particularly among the wealthiest cohorts of the population. With the hyperscalers set to invest an amount equivalent to nearly 2% of gross domestic product this year—much of it on physical infrastructure within the US itself—the continuation of the boom matters for inflation as much as for growth. And capital flows into the United States could hinge on the extent to which the sector continues to outperform.
Bottom line: The weekend truce has given the TACO trade renewed momentum, lifting risk assets and weighing on the dollar. But with major uncertainties embedded in Wednesday’s Fed decision, Thursday’s data, and the tech sector’s earnings releases, the near-term path of least resistance still points toward a stronger greenback.
*There are caveats to this model. When expressed as fractional probabilities, odds on Fed moves are means rather than distributions, so they can represent two-sided markets that average out. Also, where more than one move was priced, the subjective “uncertainty” may have exceeded current levels.
**The hotter the model, the more caveats.
***From what I can tell, there are no cases in which two opposing camps fully offset each other in the recent data, but further investigation may turn one up.