Risk sentiment steadies ahead of key policy signals

Market overview

The dollar has softened against most G10 peers as firmer equity markets restore some confidence across risk assets. Sentiment has also been helped by reports that the US and Iran are set to resume negotiations, despite tensions over the weekend. The pullback in oil, however, has weighed on commodity-linked currencies such as the Australian dollar, Canadian dollar and Norwegian krone, while the yen remains under pressure.

We continue to view the oil move as stretched and see scope for selected high-carry currencies, particularly AUD and NOK, to perform better over the summer should energy prices stabilise at moderately higher levels.

Attention now turns to the US data calendar. Consumer confidence is expected to deliver a strong reading, reinforcing the view that household demand remains resilient. Job openings are likely to ease, but not enough to undermine the broader signal of a still-healthy labour market. On balance, today’s releases may offer the dollar modest support, although the loss of bullish momentum suggests the bar is high for another sharp move higher before this week’s key Fed and labour market events.

USD: Data may help, but upside momentum is fading

The dollar enters today’s session without the conviction that supported its recent advance. A stronger consumer confidence print could keep the US resilience story intact, while a softer JOLTS reading should still leave the labour market looking broadly firm.

The overall impact should be neutral to mildly positive for USD, but improving risk appetite is limiting demand for defensive dollar exposure. Markets may prefer to wait for Fed Chair Kevin Warsh’s Sintra remarks and Thursday’s jobs report before taking a stronger directional view.

JPY: Intervention risk rises as USD/JPY grinds higher

USD/JPY continues to push higher, raising speculation that Japanese authorities could step back into the market. The pair’s approach towards levels seen as sensitive for Tokyo is likely to keep intervention risk firmly on the radar.

That said, officials may be reluctant to act before markets have digested this week’s US policy commentary and jobs data. Thin liquidity around the US holiday could also influence timing. Even if intervention does arrive, it is more likely to slow the move than reverse it. A sustained turn lower in USD/JPY would probably require a more forceful Bank of Japan tightening cycle alongside a broader decline in the dollar.

GBP: Sterling supported as political risks are delayed

Sterling may enjoy a period of relative outperformance, particularly against the euro and other non-dollar currencies, as domestic political and fiscal risks are pushed further into the autumn.

Andy Burnham’s latest remarks offered an optimistic tone but limited policy detail, giving markets little reason to reprice UK risk aggressively. His commitment to respecting fiscal rules also helped the event pass without disruption.

With politics currently a background issue, the pound continues to follow the path of least resistance higher on selected crosses. Elevated UK yields remain supportive, helped in part by the recent rise in energy prices and the Bank of England’s cautious stance. GBP/USD, however, may remain more constrained given the strength of the US leg and ongoing expectations for a firm Federal Reserve policy stance.

EUR: ECB communication remains steady

ECB President Christine Lagarde offered a measured message at Sintra, giving markets little reason to rethink expectations for further tightening this year. Her comments suggested the ECB does not need to respond as forcefully as it did in 2022 and 2023, while still recognising that the economy has shown resilience.

Eurozone inflation data remain in focus this week. Spain surprised to the upside, while France is expected to slow and Germany is forecast to remain unchanged. Taken together, the data are unlikely to trigger a major euro repricing unless the regional picture shifts more decisively.

EUR/USD may face some downside risk ahead of US data and Fed commentary, but we favour stabilisation around, or slightly above, the 1.140 area rather than a renewed test of last week’s lows.

Looking ahead

• US consumer confidence and JOLTS data will set the tone for the dollar today.

• Fed Chair Kevin Warsh’s Sintra speech is the next major policy risk event.

• Thursday’s US jobs report could provide clearer direction for USD pairs.

• Eurozone CPI releases remain important, but may not materially shift ECB pricing.

• USD/JPY intervention risk is rising, particularly as liquidity conditions thin.

• Sterling may continue to outperform on crosses while UK political risks remain delayed.