The list of risks grows

Evidence tier: A1 Evidence type: Auto-discovered official publication Source: Convera Company News Official publication date: 2026-07-24 Captured: 2026-07-24T13:38:02.855Z

USD: Risks remain tilted to the upside

The US dollar remains well supported as markets grapple with a difficult mix of geopolitical escalation, renewed trade uncertainty and fading confidence in some of this year’s dominant equity themes. The DXY is on track for its strongest weekly performance in five weeks and is rapidly approaching a one year near 102, supported by both safe-haven demand and a renewed rise in energy prices.

The immediate catalyst remains the Middle East. Brent crude is once again testing the $100 mark as US-Iran hostilities continue and Houthi attacks threaten the Red Sea shipping routes that had helped offset disruptions through the Strait of Hormuz. Just weeks ago, investors were debating excess supply and falling oil prices. That narrative has flipped decisively as the risk of broader supply disruptions grows and energy markets tighten.

The implications extend well beyond oil. Higher energy prices are reviving inflation concerns and reversing the recent decline in rates volatility. Markets had begun to unwind expectations for tighter monetary policy following softer US inflation data and repeated ceasefire efforts. That process is now going into reverse. US yields are back near their highs of the year, helped by an exceptionally strong labour market backdrop, with initial jobless claims falling to just 187k – the lowest reading since 1969.

At the same time, renewed trade uncertainty is adding another layer of complexity. President Trump’s decision to impose fresh tariffs on more than 60 countries threatens to weigh on global growth and further fragment supply chains. Combined with growing signs of fatigue in the AI-driven equity rally, risk sentiment is becoming increasingly fragile.

Yet FX markets remain strikingly calm. Volatility remains suppressed and investors continue to favour high-yielding currencies and carry trades, limiting the dollar’s upside despite a fundamentally supportive backdrop. That equilibrium looks increasingly vulnerable.

The main risk to the bullish USD view may not be lower yields or better risk sentiment, but a disorderly JPY-led carry unwind that leaves the dollar stronger against most currencies while still weaker against the yen.

For now, volatility remains conspicuously subdued, even as geopolitical risks accumulate. With the weekend approaching and next week’s Fed meeting on the horizon, markets may be underestimating the potential for a sharper repricing.

EUR: ECB holds firm as markets price more hikes

The ECB left all three policy rates unchanged, keeping the deposit rate at 2.25%. President Lagarde reiterated the Bank’s meeting-by-meeting approach, with future policy decisions remaining firmly data dependent.

She also stressed that inflation risks remain tilted to the upside, noting that the Governing Council no longer holds the more balanced view on inflation and growth dynamics she referenced at the ECB’s annual conference in Sintra before tensions in the Middle East began to ease.

The euro’s reaction was broadly muted, despite briefly touching a three-week low against the US dollar amid a surge in oil prices.

Markets had already turned more hawkish ahead of today’s meeting. The two-year OIS rate has risen steadily since the conflict re-escalated and is now hovering near its highest level since mid-2024. The bar for further hawkish repricing was high.

Investors are now pricing in almost two rate hikes by year-end, with the first expected in September. We favour just one additional hike. Developments in the Middle East remain fluid, but the balance of risks still points towards further de-escalation. At the same time, a softening labour market and weaker economic activity across the eurozone should help keep second-round inflation effects in check.

GBP: Summer rally loses momentum

Sterling is on track for its weakest week in five against the dollar and its poorest week against the euro since May, relinquishing part of the strong gains accumulated earlier this month. Initially, the catalyst was difficult to identify. GBP weakened against both higher-beta and defensive currencies, suggesting the move reflected profit-taking after an extended rally, particularly versus the euro, rather than a single dominant macro driver.

As the week progressed, however, softer risk sentiment emerged as a more convincing explanation. Sterling’s high-beta characteristics left it vulnerable as markets grew more cautious. At the same time, the energy channel has reasserted itself. Rising oil prices have favoured commodity-linked currencies, leaving GBP down notably against the NOK and CAD despite still-supportive UK yield dynamics.

The rates channel has also become less sterling-friendly. Markets are now pricing close to three Bank of England rate hikes by mid-2027, yet there is a growing sense that investors may be overestimating how aggressively policymakers will respond to higher energy prices. Several MPC members have already acknowledged scenarios involving persistently elevated oil prices, limiting the scope for further hawkish repricing.

Domestic developments have done little to help. Despite much stronger-than-expected retail sales data, sterling barely reacted, suggesting UK macro releases are currently taking a back seat to broader global themes. Meanwhile, concerns around fiscal policy linger after Prime Minister Burnham unveiled a series of spending measures in quick succession, reviving questions around borrowing and fiscal discipline.

For now, a combination of softer risk sentiment, higher energy prices and lingering fiscal concerns is overshadowing supportive domestic data, leaving sterling vulnerable to further consolidation after its strong summer rally. Technically, GBP/USD is approaching the 100-week moving average near 1.32, while GBP/EUR is testing key support around 1.17, with both the 21-day and 100-week moving averages likely to prove pivotal for the next directional move.

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Key global risk events

Calendar: July 20-24

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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.