Dollar demand returns as energy risks resurface
Market overview:
The dollar has regained momentum as renewed tensions in the Middle East push oil sharply higher and bring geopolitical risk back into focus. Brent crude rose more than 8%, briefly moving above $80 a barrel, after President Trump said the ceasefire with Iran was effectively over following fresh attacks on commercial shipping in the Persian Gulf.
The move has challenged the market’s recent confidence that tensions were easing. Improved shipping flows through the Strait of Hormuz and the earlier fall in oil had encouraged bearish positioning, leaving prices exposed to a sharp squeeze when risks returned.
Higher energy prices have revived inflation concerns and pushed bond yields back towards 2026 highs. For FX, that supports the dollar through firmer US rate expectations and weaker risk appetite. While the latest moves could reverse if negotiations restart, the near-term balance of risks now favours the greenback.
USD: dollar supported by rates and risk demand
The dollar is benefiting from a more defensive market tone and renewed focus on inflation risks. Money markets had already begun pricing a more hawkish Fed path, and the latest rise in oil makes it harder for investors to lean towards policy easing.
The wider FX reaction has been measured, suggesting markets are adjusting to a higher-for-longer environment rather than treating each shock as a fresh crisis. However, any further escalation from Iran could see a larger geopolitical premium priced in, extending dollar gains.
GBP: sterling holds near one-year highs
Sterling continues to grind higher against the euro, with GBP/EUR near one-year highs after breaking through the long-standing 1.16 resistance area. The move appears to have triggered short covering, supported by the gradual unwinding of structurally bearish sterling positioning built up since Brexit and the mini-budget period.
The pound also continues to benefit from one of the highest policy rates in the G10 and solid inbound M&A flows. The main risks now are the June inflation print on 22 July and the Bank of England meeting on 30 July. If inflation undershoots, or the MPC signals that price pressures are easing, some hawkish pricing could be removed and weigh on sterling.
EUR: euro struggles despite higher yields
The euro remains under pressure, with EUR/USD hovering near 1.14. What stands out is that the currency is weakening even as European yields rise. Ordinarily, higher yields might help, but this move reflects higher energy costs, tighter financial conditions and renewed stagflation concerns.
That leaves the euro in a difficult position. Falling yields hurt through softer ECB expectations, while rising yields are currently linked to negative growth and inflation dynamics. With the US economy still looking more resilient and options markets showing greater demand for protection against euro weakness, the balance of risks for EUR/USD remains tilted lower.
Looking ahead
US CPI next week could shape Fed pricing and EUR/USD direction.
Any further Iranian response or disruption around the Strait of Hormuz remains a key risk.
Oil volatility could spill into rates, equities and FX.
UK inflation on 22 July will be important for sterling.
The Bank of England meeting on 30 July could challenge current hawkish pricing.
Unless geopolitical tensions ease meaningfully, the dollar is likely to stay supported near term.