Markets maintain their cool despite the ongoing standoff

Evidence tier: A1 Evidence type: Auto-discovered official publication Source: Convera Company News Official publication date: 2026-07-22 Captured: 2026-07-22T15:52:38.832Z

USD: DXY firms, conviction lags

The US Dollar Index rose for a fourth consecutive session yesterday, closing above the 101 handle. Even so, it remains below the 24 June high of 101.80 reached on a hawkish Fed repricing.

The pre-meeting blackout period leaves little room for fresh policy signals, while softer-than-expected CPI and PPI prints this month, alongside a weak June jobs report, have dented market conviction in how hawkish the Fed will ultimately be this year. Rebounding oil prices remain the key latent factor that could revive dollar support via the rates channel. For now, however, dollar buyers may be waiting for a more actionable catalyst, whether a major data release or the Fed meeting itself, to rebuild tightening expectations. After all, despite the retreat in oil prices from their March peaks, front-end rates have remained remarkably resilient. With the 2-year SOFR OIS rate still near its highest level since early 2025, the bar for further hawkish repricing, and by extension sustained dollar gains, appears relatively high.

On the safe-haven front, support has been relatively muted despite the recent geopolitical re-escalation. Markets continue to view developments as tit-for-tat exchanges within a broader negotiation framework. Reports that mediators are attempting to revive the truce, combined with both sides’ reluctance to declare diplomacy officially dead, have reinforced a degree of market complacency, limiting the dollar’s safe-haven appeal.

For the remainder of the week, focus shifts to the preliminary July PMIs on Friday. We expect price action to remain relatively contained within the 100.50-101.50 range as markets continue to assess the prospects for a renewed ceasefire following the most severe re-escalation since the truce was signed.

EUR: Euro risks tilt lower

EUR/USD remains trapped in a tight 1.14-1.1450 range, with risks skewed to the downside amid the ongoing geopolitical flare-up. Despite the EUR:USD OIS rate spread having re-widened in the euro’s favour in recent sessions, the common currency is struggling to draw the same degree of support from the rates channel as the US dollar. One reason is the eurozone’s dependence on imported energy. Higher energy prices weaken the bloc’s terms of trade, the ratio of export to import prices, creating a headwind for the euro.

At the same time, the relatively contained risk-off reaction to the latest geopolitical re-escalation has, for now, prevented a deeper selloff toward the June low at 1.1325.

The key event for the remainder of the week is tomorrow’s ECB policy meeting, where the expectation is for policymakers to hold steady. We do not anticipate particularly exciting euro price action and outlined our reasoning in Monday’s note.

Unless geopolitical sentiment shifts in the coming days and the path toward de-escalation is re-established, the pair looks set to revisit the sub-1.14 area.

GBP: Goodwill meets reality

Yesterday’s price action pointed to a sterling-specific correction rather than a broader macro regime shift. Equities were firm, volatility subdued, higher-beta currencies strengthened and gilt yields were broadly unchanged. That somewhat complicates the argument that markets are aggressively rebuilding a fiscal risk premium into UK assets. Instead, profit-taking following sterling’s strong run and a reassessment of how much goodwill has been extended to the new Burnham government appear the more likely drivers.

That said, if the move is indeed linked to Burnham’s unfunded spending pledge earlier this week, it offers an early reminder of how sensitive the pound may prove to fiscal policy under the new administration. GBP/EUR had recently reached a one-year high above 1.18 and looked increasingly stretched relative to rate differentials, leaving sterling vulnerable to a pullback. More importantly, the episode suggests that confidence in the UK’s fiscal trajectory remains conditional and could be tested much more forcefully should future policy announcements raise broader questions around borrowing, spending and fiscal discipline.

However, the UK’s fiscal credibility premium appears to have stopped widening since early 2025. In other words, markets still demand an additional premium to hold gilts, but they no longer appear to be treating the UK as an increasingly isolated fiscal outlier.

This morning’s inflation report offered some relief. Headline CPI slowed to 2.6% y/y from 2.8%, undershooting expectations, while core inflation steadied at 2.6%, a tick above forecast. Services inflation slowed to 3.6% but proved slightly firmer than forecast as well. Still, the broader message was one of cooling domestic price pressures. Under normal circumstances, such inflation figures would likely prompt a more meaningful reassessment of BoE expectations. However, the market’s attention remains firmly fixed on developments in the Middle East. Rising oil prices and the prospect of higher household energy bills from July mean investors are treating today’s data as more backward-looking than usual.

Indeed, although the BoE is expected to keep rates on hold next week, markets continue to price roughly one rate hike by year-end, with inflation expected to re-accelerate over coming months. With energy costs rising and geopolitical risks pushing commodity prices higher, investors continue to expect renewed price pressures in the months ahead. That should help anchor front-end gilt yields and preserve part of sterling’s yield advantage, even as growth momentum remains weak.

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.