Euro gains as rising oil prices, bond yields, and Middle East tensions drive expectations for a September ECB rate hike.
US Dollar remains under pressure as Treasury's plan to double long-term bond buybacks.
Markets await US consumer confidence, PCE inflation data, and Fed Chair Kevin Warsh's Jackson Hole speech.
EUR/USD inches higher after posting minor losses in the previous day, trading around 1.1670 during the Asian hours on Tuesday. The pair finds support as rising oil prices, elevated bond yields, and escalating Middle East tensions drive Eurozone inflation concerns. These factors have boosted expectations for a more hawkish stance from the European Central Bank (ECB), which is widely anticipated to deliver a 25-basis-point rate hike in September following its June tightening.
Meanwhile, sovereign yields on longer-maturity Eurozone securities remain near multi-decade highs. They are tracking US yield movements driven by worries over Washington’s deficit spending and fears that the Federal Reserve (Fed) may be taking a complacent approach to persistent inflation.
Strategists at Scotiabank note that the flow of macro news has been relatively light, with "fundamental releases have been limited" ahead of what they describe as this week’s key event: "the German IFO business sentiment figures scheduled for Tuesday." They add that shifting rate dynamics are weighing modestly on the single currency, as "yield spreads have pulled back slightly, eroding some of the EUR’s support as US Treasury yields have climbed over the past week or so."
Meanwhile, the US Dollar (USD) remains under pressure after the US Treasury decided to double its buyback operations for longer-dated bonds. Reports indicate that US Treasury Secretary Scott Bessent could utilize nearly $1 trillion from the Treasury General Account to fund these operations. Tensions are also escalating geopolitically, as the US expands secondary sanctions against entities doing business with Iran. Secretary Bessent warned that a major financial institution could face sanctions this week, explicitly noting that China will not be exempt.
Looking ahead, market participants are focused on key US economic events scheduled for this week. Consumer confidence data will be released on Tuesday, followed by the Personal Consumption Expenditures (PCE) price index on Wednesday. Additionally, Federal Reserve Chair Kevin Warsh is set to deliver a speech on Friday at the annual Jackson Hole symposium, which could offer further direction for the Greenback.
Strategists at Scotiabank highlight that the “calendar and event risk this week is significant,” noting that the combination of key data releases and policy signals is encouraging investors to reassess exposures. In their view, this backdrop creates “the potential for some moderate gains in the USD broadly in the short run” as market participants “pare back positioning,” with the Dollar benefiting from a more cautious stance ahead of the upcoming risk events.
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