FX breaks from the range
Market overview
FX markets are starting the session with a clear dollar bias, as higher US yields, softer risk appetite and renewed policy divergence push the greenback to the front of the pack. The move has left EUR/USD under fresh pressure below 1.14, dragged GBP/USD beneath 1.32 and helped GBP/EUR break through the heavily watched 1.16 area, with investors favouring the dollar as both a yield and defensive play.
The move has been building since the Fed’s June meeting, where rates were held at 3.50% to 3.75% and the previous easing bias was effectively removed. Markets have since shifted towards a higher-for-longer US rates narrative, with the dollar emerging as the cleanest expression of that repricing.
Kevin Warsh’s arrival has reinforced the shift. While investors are still taking guidance from the SEP and dot plot, the new Fed chair has signalled a more conditional and less predictable communication framework. That matters most at the front end, where two-year yields have carried the bulk of the repricing.
For now, the dollar breakout looks credible. However, positioning is becoming crowded, oil’s earlier support is fading as the US-Iran ceasefire holds, and RSI signals are nearing stretched territory. Further gains may now require fresh confirmation from the data rather than momentum alone.
USD: Breakout confirmed, but chasing strength looks less straightforward
The dollar remains in control, helped by hawkish Fed repricing, safer-haven demand and renewed pressure across major FX pairs. EUR/USD has slipped below 1.14, GBP/USD has fallen below 1.32, while GBP/EUR has pushed through the heavily watched 1.16 area.
The reaffirmation of Fed independence has also helped reduce part of the policy risk premium that weighed on the greenback earlier this year. That has added another layer of support at a point when markets are already reducing exposure to risk.
That said, the next phase may be harder. Bullish dollar sentiment looks extended, the crude-driven terms-of-trade boost is fading, and the best of the US data surprise may now be behind us. If inflation softens over the coming months, June could come to be seen as peak Fed hawkishness.
GBP: Sterling hit by dollar strength, but holds firmer against the euro
Sterling weakened against the dollar, with GBP/USD falling below 1.32, but the move was largely driven by the US side of the equation. Against the euro and other higher-beta currencies, the pound has shown more resilience.
That resilience reflects both relative yield support and improving political clarity. UK yields remain elevated versus much of the euro area, keeping carry demand for sterling intact. At the same time, signs of a smooth transition towards a Burnham-led government have helped reduce near-term political risk, particularly after Wes Streeting backed Burnham rather than launching a leadership challenge.
GBP/EUR has broken through the heavily watched 1.16 area, a level that has repeatedly capped gains since last August. A sustained move above this zone would point to improving momentum, with 1.1630 the next technical marker.
The domestic backdrop is still far from comfortable. June PMIs showed services moving deeper into contraction, while manufacturing strength appeared to be flattered by stockpiling. The Bank of England is therefore facing a difficult combination of weak activity and persistent inflation pressure, limiting the scope for a cleaner sterling rally.
EUR: Rate divergence keeps the euro under pressure
The euro has failed to benefit from lower oil prices and easing geopolitical risk following the US-Iran peace deal. Instead, investors have refocused on rate differentials, with falling energy prices now seen as reducing the need for further ECB tightening rather than simply improving the growth outlook.
Lagarde’s dovish comments on Monday added to that pressure, as she signalled little need for a stronger policy response to Middle East-related risks. That contrasted with more hawkish remarks from officials such as Peter Kažimír, highlighting the lack of clear consensus within the Governing Council.
The latest euro area PMI data also pointed to a slower pace of price growth, weakening the case for further tightening. Set against a Fed that has recently reasserted its hawkish stance, the divergence is becoming increasingly difficult for EUR/USD to ignore.
EUR/USD has now broken below 1.14, a key level that had rarely been tested since the pair moved into the 1.15 to 1.18 range last summer. The downside move looks more fundamentally grounded than previous tests, though near-term technicals are becoming stretched ahead of US PCE.
Looking ahead
US PCE is the key event risk, with a hotter print likely to reinforce the dollar breakout.
EUR/USD consolidation is possible after the break below 1.14, but rallies may remain shallow while Fed-ECB divergence persists.
GBP/EUR needs to hold above 1.16 to confirm a more durable technical shift.
DXY momentum remains strong, although stretched positioning leaves the dollar vulnerable to any softer US inflation signal.
UK political developments and incoming activity data will remain central to sterling’s ability to extend gains against the euro.