Markets push through the pressure
Market overview: FX markets steady as dollar momentum fades
FX markets start the week on a more measured footing, with recent dollar strength losing some of its edge and major pairs settling into familiar ranges. The broader tone is one of consolidation rather than conviction, as softer inflation signals, lower oil prices and a lighter data calendar leave investors reluctant to chase moves too aggressively. With central bank expectations still doing most of the heavy lifting, the next meaningful shift in direction is likely to come from fresh evidence on inflation and labour market resilience.
The dollar’s advance has started to lose momentum after the DXY touched a 15-month high of 101.800 on 24 June. A softer US labour market report last Thursday accelerated the pullback, with investors now demanding stronger evidence before extending bets on a more hawkish Federal Reserve.
Lower oil prices continue to ease inflation concerns, while last week’s sharp reaction in the dollar and front-end US yields showed how heavily markets had leaned into a firmer Fed narrative. With the US data calendar quiet until next week’s CPI release, near-term trading is likely to be defined by consolidation rather than fresh trend extension.
Questions around Fed independence are also moving back onto the radar. Reports that President Trump and close allies are exploring ways to remove members of the Fed’s Board of Governors may not be an immediate dollar driver, but the theme remains relevant. Earlier this year, similar concerns weighed on the greenback, and the issue could regain importance if geopolitical risks continue to fade.
USD: Rally pauses as Fed expectations become harder to defend
The dollar’s recent strength looks more vulnerable as investors reassess the likelihood of a more aggressive Fed path. The appointment of Fed Chair Warsh initially supported the greenback, helped by relief that he did not signal a dovish pivot. However, markets are now taking a more nuanced view. His scepticism towards forward guidance does not automatically make him a committed hawk, leaving rate expectations more exposed to softer data.
For now, the DXY looks likely to hold within a 100 to 101 range. Initial support sits around 100.60 to 100.80, where the 21-day moving average is located. A move below that would bring stronger support at 100.20 to 100.00 into focus.
GBP: Sterling rebounds, but the upside case remains fragile
Sterling delivered its strongest weekly gain against the dollar since early April, with GBP/USD closing 1.1% higher and recovering much of the ground lost after the Fed’s hawkish June meeting.
The pair has moved back above its 21-day moving average near 1.33. The next important resistance zone is 1.3400 to 1.3440. A decisive break above this area would be needed to challenge the broader downtrend that has been in place since early May.
UK politics may offer some short-term support if Starmer outlines a clear timetable for his departure and markets judge the transition to be swift and orderly. Even so, dollar dynamics remain the cleaner driver. A sustained move above 1.34 based purely on a less negative UK political backdrop still looks difficult to justify.
Domestic inflation signals are also turning less supportive for the pound. The Decision Maker Panel survey showed one-year inflation expectations falling to 3.3% in June, below the 3.6% consensus estimate and down from 3.7% in May. This reinforces the view that inflation risks are easing as oil prices reverse their conflict-led gains, strengthening the case for a prolonged Bank of England pause rather than further rate increases.
EUR: Euro steadies, but momentum remains limited
EUR/USD closed last week 0.5% higher, although it continues to trade just below its 21-day moving average near 1.1470. That keeps the broader bearish bias in place for now.
The pair has been drifting lower since April’s 1.1849 high, as fading geopolitical risk has triggered a sharper unwind in ECB rate hike expectations than in Fed pricing. Last week’s eurozone CPI report added to that story. Softer services and core inflation suggested disinflation is not simply the result of lower energy prices, while second-round effects from the earlier energy shock now appear more contained than previously feared.
This strengthens the case for the ECB to remain on hold for an extended period. That said, we do not see significant further downside for EUR/USD from current levels. The Fed is also exposed to the disinflationary impact of lower oil prices, and while the US macro backdrop remains firmer, markets are increasingly likely to price out additional Fed hikes later this year.
For the week ahead, EUR/USD is likely to remain anchored within the 1.14 handle. Resistance is seen at 1.1450 to 1.1470, followed by 1.1500 to 1.1520. Support around 1.1350 should remain firm.
Looking ahead
The US CPI release next week is the key event risk for the dollar and front-end US yields.
DXY is likely to consolidate between 100 and 101 unless incoming data shifts Fed pricing materially.
GBP/USD needs a clean break above 1.3400 to 1.3440 to challenge the recent downtrend.
EUR/USD should remain rangebound, with 1.1350 support and 1.1500 to 1.1520 resistance in focus.
Softer inflation expectations in the UK and eurozone support the case for prolonged central bank pauses.