Hump Day: War And The FOMC

New hostilities in the Middle East have lifted oil prices for the first time in four sessions and is snapping the three-day decline in European and US bond yields. The US dollar is mostly narrowly mixed against the G10 currencies.  Softer than expected CPI has reduced the perceived chances the Reserve Bank of Australia will hike rates again this year, after delivering three hikes in H1 26. The Australian dollar is at more than two-week lows today and is off almost 0.5%; the weakest in the G10. Among emerging market currencies, despite the continued volatility in the equity markets, the South Korean won and the Taiwanese dollar are among the strongest today. The PBOC set the dollar’s fixing at a new three-year low.

The outlook for today’s FOMC meeting is among the most uncertain it has been for some time. This may become a new feature with Chair Warsh, who eschews “forward guidance”.  Most observers lean against a hike, but at the last meeting half of the “dots” implied a rate hike this year. And despite the softer June CPI and PPI, the war and tariffs continue to underpin price pressures.  The Fed funds futures have almost 44 bp of tightening discounted before the end of the year. 

Prices 

G10

• Falling oil prices and the drop in US yields helped fuel the euro’s recovery from a new low for the month in early North American activity (slightly below $1.1355) to new session highs, near $1.1410. It stopped shy of the Monday’s high (~$1.1420) and the 20-day moving average (~$1.1415). It probably requires a move above the $1.1430 area to suggest a low may be in place. It is confined to about a quarter-of-a-cent range today above $1.1380. About 1.1 bln euros of options at $1.1415 expire today and nearly 2 bln euros at $1.1375 expire tomorrow.

• The dollar initially crept up to JPY163.95 against the yen early North American turnover yesterday before it returned to the session low near midday in NY (~JPY163.65), arguably dragged lower by the decline in US rates. It frayed Monday’s low, near JPY163.30 today, but has recovered to JPY163.70 by early European activity and has found support near JPY163.50., where options for $1.45 bln expire tomorrow.  A convincing break of JPY163.30 would suggest a potential double top is in place, which projects toward JPY162.60.

• Sterling was sold to about $1.3275 yesterday, its lowest level since July 2 before the greenback’s broader retreat saw sterling recover to around $1.3310. It has held below $1.3310 today and found bids near $1.3280. Still, it must recapture the $1.3320-30 area to lift the technical tone. 

• The US dollar reached a new two-week high against the Canadian dollar yesterday, near CAD1.4130, before the greenback’s broad setback. It fell to nearly CAD1.4085. It is holding today. Options for ~$500 mln at CAD!.4100 expire today. A break of CAD1.4050 could signal a retest on last week’s low around CAD1.40.

• The Australian dollar fell to a two-week low yesterday (~$0.6965), though it held the 20-day moving average and recovered, it was unimpressive. Softer than expected inflation data early today pushed the Aussie slightly below $0.6940 today. Since the low was recorded, it has not been above $0.6960.  

EM 

• The Mexican peso traded mostly inside Monday’s range yesterday. The US dollar traded between about MXN17.4175 and MXN17.4930. It is in a narrower range today of roughly MXN17.4275-MXN17.4600. The first estimate of Q2 GDP will be reported tomorrow. Economists expected a trade-related recovery after a 0.6% quarter-over-quarter contraction in Q1. 

• The dollar recorded an inside day against the offshore yuan yesterday. The greenback has been in a CNH6.7630 to CNH6.7820 range for two weeks. It has traded in a CNH6.7655-CNH6.7745 range so far today. The PBOC set the dollar’s reference rate at CNY6.7899 (CNY6.7928 yesterday), a marginal new three-year low. 

• The Indian rupee rose today for the third consecutive session, which is its longest advance this month. Rising equities and the generally softer dollar buoyed the rupee. The dollar settled near INR96.57 at the end of last week and briefly slipped through INR95.49 today, its lowest level since July 10.  The S&P 500 and Nasdaq futures are 0.2%-0,3% higher.  Microsoft and Meta report earnings today. 

Other Markets

• Most large equity markets in Asia Pacific recovered some of the ground lost in yesterday’s onslaught, helped perhaps by the stabilization of the Nasdaq, which initially fell to new three-month lows before recovering and settling near its highs. Still the chip space remained under pressure and took South Korea’s Kospi down another 6%, with Taiwan’s Taiex dropping 3.75%. Europe’s Stoxx 600 has a three-day advance coming into today—less exposed to tech and energy—but is off almost 0.2% in the morning session. 

• Benchmark 10-year yields have stabilized today after a three-day drop in Europe and the US. Over those three days, the 10-year Treasury yield and German Bund yield both fell by 10 bp. The yield on the 10-year Gilt fell by 16 bp. Yields are mostly 2-4 bp higher in Europe today and the 10-year US Treasury yield is up a little more than one basis point to 4.62%. 

• Gold has not found much traction in recent days despite the drop in yields and lower oil prices. It recorded a five-day low yesterday, slightly below $4012. The attempt to recover stalled in front of $4050. It made a marginal new low today but held above $4010. The upside remains blocked around $4050. Silver also recorded a five-day low yesterday (~$56.65). Upticks were capped, near $57.50. It rose to nearly $58.25 today, where it stalled. 

• Optimism over ongoing US-Iran talks drove the price of September WTI slightly through $77.80 yesterday, a few cents from the 20-day moving average and a little above the (61.8%) retracement of the rally from earlier this month. However, new hostilities today lifted the contract to $83.30. It has straddled the $82 area throughout the European morning. 

Data

• The conclusion of the FOMC meeting is today’s highlight. The Fed funds futures are discounting about nine points of a hike. This is about a 1-in-3 chance of a hike, which seems somewhat elevated to us. The softer than expected June jobs growth and moderating June CPI and PPI would seem to buy officials some time given the lack of visibility (Middle East war and impromptu tariffs). The Fed funds futures have fully discounted a hike at the September meeting and have slightly more than a 70% chance of another hike at the end of the year. Chair Warsh will hold a press conference afterwards, as has become customary. 

• The UK reported a slight sequential improvement in mortgage lending in June and a nearly steady increase in net consumer credit. The data have not impacted expectations for the outcome of tomorrow’s Bank of England meeting. The swaps market is pricing in practically no chance of a change in policy.  There is about a 55% chance discounted for a hike at the September meeting, and a hike is fully discounted for the early November meeting.

• Australia’s June CPI was softer than expected and this has seen the futures market downgrade the chance of a rate hike, which has, in turn, weighed on the Australian dollar. Given the base effect, unexpected 0.1% decline in Australia’s June CPI saw the year-over-year pace ease to 3.8% from 4.0%. The Q2 reading rose by 0.6% after it rose 1.4% in Q1 26. The quarterly trimmed mean rose by 0.8% (the same as in Q1 26) for a 3.6% year-over-year rate, up from 3.5% in Q1. This is the fastest quarterly pace since Q2 24 and the fourth consecutive quarterly increase. The probability of a hike next month has been modest and now negligible. Arguably, more significant is that the implied odds of a hike this year have fallen for the third consecutive session.  At the end of last week, 30 bp of tightening was discounted and now slightly less than 13 bp are priced into the futures strip.