FX market news

The market has continued to show complacency in the face of upticks in geopolitical risk and oil prices. There are reactions, sure, but they are restrained as long as the attacks do not affect critical energy infrastructure (see more).

In FX, the USD rally continued to its mid-May 2025 highs on June 24-25 (see more), but since then we have been in a consolidation phase at somewhat lower levels (see more). Meanwhile, the EURUSD has corrected, albeit slightly, consolidating in a narrow range of 1.14 - 1.1460, after finding support at 1.1325.

Movements in the currency markets have been conditioned by two main factors, once the correlation with geopolitics decreased (although these issues remain unresolved):

1. Interest rate spreads and monetary policy: The fall in energy prices weighed down sovereign bond yields and contained expectations of interest rate increases by central banks (see more) by reducing the risks of inflation. Federal Reserve Governor Kevin Warsh acknowledged this fact at the Sintra Forum.

With the recent rebound in crude oil prices, upward pressure on interest rates has returned (see more), however, we maintain that inflation and the health of the macroeconomic cycle will determine the actions of the Fed and the ECB, and to a large extent the USD and the EUR as well.

In this regard, June's US employment report States was key. It reflected a slowdown in the US labor market. The market's strong optimism about the strength of the American economy has tempered, with expectations of Fed rate increases also being contained, weighing on the USD (see more). 

1. Speculative flows: Optimism surrounding the US economy and its technology sector, along with expectations of Fed interest rate hikes, have driven the market to its highest USD levels in several years (see more). A market that is already so bullish in dollar terms limits its upside potential if there are no further positive surprises in the US economy or negative developments on the geopolitical front.

Therefore, in our opinion, in the short term the underlying consolidation trend for the USD should continue, even with more profit-taking.

Macroeconomic dynamics (inflation, labor market activity) will be key determinants for major currencies in the coming months.

The persistence of underlying inflation in the US will be the key factor to watch, followed by the weaker US labor market, which has slowed down in the summer for the past two years. In Europe, if the data weakens again, the EUR will suffer, but if geopolitical risks continue to subside, a gradual recovery is expected.

EURUSD Outlook: If the macro scenario we foresee materializes and the ECB vs Fed diverge—the Fed with stable rates and the ECB completing the cycle with another rate increase—then we would see a recovery in the EURUSD. Although in the very short term we see a tactical consolidation, around 1.14, in the medium and long term we see a clear opportunity to buy on these dips. We consider any bearish breakout (towards 1.1325 - 1.1400) as an attractive entry point (see more).

For our latest views on the foreign exchange market, the drivers and forecasts for the USD, EUR and the rest of the G10 currencies, Latin American currencies, CNY and TRY, see our FX Outlook publication (here).