Rising oil is main short-term risk

Evidence tier: A1 Evidence type: Auto-discovered official publication Source: Convera Company News Official publication date: 2026-07-20 Captured: 2026-07-20T13:22:41.662Z

USD: Inflation cools, but focus returns to oil

The US dollar starts a new week with softer Fed pricing, but not a clean weak-dollar setup. Last week’s CPI and PPI reports both came in below expectations, helping pull front-end Treasury yields lower and cooling near-term Fed hike risk. The 2-year yield fell back toward 4.18% after touching a one-year high near 4.29%, while the 10-year eased from its July 13 high near 4.63% to around 4.55%. The move left markets with a less hawkish Fed path, but the dollar’s decline stayed contained outside oil-sensitive currencies.

The inflation data did not make a strong case for more tightening. Headline CPI fell in June, core CPI was flat, and PPI followed with a downside surprise of its own. That supports the view that peak Fed hawkishness may be behind us, with the central bank more likely to stay on hold through the second half of the year. Still, one week of softer data does not settle the inflation debate. Fed Chairman Kevin Warsh’s pushback against any “mission accomplished” reading should keep markets careful.

Oil is now the main short-term risk. Brent has touched $90 a barrel, and WTI is firmer as the US and Iran continue tit-for-tat strikes. As further escalation in the Middle East has lifted crude again, higher gas prices could revive concerns about energy feeding into core inflation. That would push markets back toward the uneasy pre-June inflation-print setup, where Fed expectations swing with each shift in the geo-economics backdrop. This keeps the higher-for-longer Fed path in play and could put a defensive bid back under the dollar if equity risk appetite weakens.

Equities will also matter more this week. Oil prices and earnings results are likely to set the tone after last week’s mix of softer inflation, tech-sector swings and rising geopolitical uncertainty. Investors are watching whether crude retreats or gasoline moves decisively higher, while earnings will test whether heavy AI-related spending is translating into stronger profits. Recent weakness in parts of the technology complex has shifted the mood from exuberance toward more skepticism. If that turns into broader risk aversion, the dollar could find support even with lower Fed hike expectations.

The dollar’s near-term direction now depends on which force wins out. If Middle East risks fade and oil stabilizes, softer inflation should leave the greenback more vulnerable as markets lean further away from Fed tightening. If crude keeps rising, especially above $90 a barrel, and stocks come under pressure, the dollar may hold a bid from both inflation-risk repricing and safe-haven demand. For now, the data story points mildly lower for the dollar, but geo-economics is limiting the downside. That leaves the new week less about last week’s inflation relief and more about whether oil lets markets extend it.

EUR: ECB optionality to limit euro’s gains

EUR/USD spent most of July going nowhere fast. The pair has edged higher from its late June low of 1.1350, its lowest level in a year, but the recovery has looked more like a reflection of fading dollar strength than a convincing vote of confidence in the euro itself. The main forces weighing on the pair remain unchanged: Fed policy expectations and geopolitical risk.

Softer US inflation data has tempered some of the Fed’s hawkish appeal, while renewed tensions in the Middle East continue to be viewed as tit-for-tat exchanges within a broader negotiation framework, failing to trigger panic mode just yet. The euro’s softer tone against risk-sensitive commodity currencies such as the CAD, NZD, and AUD into the London open reinforces that view.

Meanwhile, we doubt this week’s ECB meeting will provide much directional impetus for the euro. Given the still highly uncertain geopolitical backdrop, Lagarde is likely to focus on preserving flexibility and maintaining full optionality.

The two-year OIS swap rate is sitting just above its level at the ECB’s June meeting, as renewed tensions around the Strait of Hormuz have prompted markets to unwind their earlier dovish repricing. The scope for additional euro upside therefore appears more constrained.

In the coming days, the 1.1350-1.1400 zone should continue to provide support for EUR/USD. That said, with oil trading at its highest level since the US and Iran agreed to a ceasefire, any harsher rhetoric this week suggesting an end to the negotiation process would likely revive risk-off sentiment more forcefully, weighing more heavily on the euro. The underlying bias therefore remains bearish.

GBP: Data, politics and the pound

Sterling enters a pivotal week with both domestic and external drivers competing for influence. Andy Burnham formally becomes Prime Minister today, while the UK calendar delivers a run of potentially market-moving releases, including labour market data, inflation, retail sales and flash PMIs. Together, these will help determine whether current Bank of England pricing remains justified and whether sterling can maintain the rate advantage that has underpinned much of its recent outperformance.

The pound enters this period on relatively firm footing. Last week, GBP/USD rallied to its highest level since mid-May, above 1.35 before pulling back, while GBP/EUR briefly climbed above 1.18 to a fresh one-year high. Much of that strength reflected a combination of easing political risk premia and a low-volatility environment that favours higher-yielding currencies via the carry trade. Hence, GBP/JPY touched its highest level since 2008, while GBP/CHF reached a one-year high. However, the picture is less impressive against higher-yielding, commodity-linked currencies. Sterling remains around 4% lower year-to-date against both the NOK and AUD.

Looking ahead, while domestic politics supported sterling through the prospect of an orderly transition of power, the market’s focus is increasingly shifting to Burnham’s first policy decisions and cabinet appointments. Expectations that Shabana Mahmood will be appointed Chancellor have been supportive, with investors viewing her as a relatively fiscally prudent choice. Yet goodwill towards the new government is already substantial, meaning markets will soon demand evidence rather than promises.

More immediately, renewed hostilities in the Middle East and rising oil prices may prove the more important driver. Recent months have shown that sterling remains highly sensitive to shifts in global risk sentiment and energy markets. Higher oil prices could support sterling via the rates channel, but they also risk undermining growth, while a further equity sell-off would likely weigh on the UK currency via the risk sentiment channel too.

In addition, the busy UK data calendar means the balance of risks is becoming more two-sided. Data momentum has softened, and recent inflation misses across the G10 suggest markets may be overestimating how much tightening central banks ultimately need to deliver. With around 50bp of BoE hikes still priced by March 2026, the risks to UK rate expectations, and by extension sterling’s rate advantage, increasingly appear skewed to the downside.

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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.