Good morning traders from a warm and pleasant Sunday in Amsterdam, where it's a comfortable start near IntelliTrade HQ before another sunny summer afternoon. Grab a coffee, settle into the charts, and let's focus on the one question I think matters most this week.
Can Softer Inflation Keep the Dollar Under Pressure as Oil Rebuilds Inflation Risks?
Overall Market Sentiment
The market starts the new week in a balanced but fragile position.
Last week gave traders softer U.S. inflation, lower Treasury yields and reduced expectations of another immediate Federal Reserve rate hike. Normally that would be enough to keep pressure on the dollar. But the story is not that simple because oil has surged on renewed Middle East tensions, and that immediately brings inflation back into the conversation.
I would not overcomplicate this. The market wants to focus on cooling inflation, while oil is reminding everyone that inflation risks have not completely disappeared. That tension is likely to define the week.
Weekly Thesis
The dominant question this week is whether markets have become too comfortable with the idea that the Fed is finished tightening.
My base case is that the Fed remains patient while continuing to push back against premature easing expectations. The dollar has lost momentum, but it has not lost its defensive qualities. If oil remains elevated and global risk sentiment stays cautious, USD weakness is likely to be much more selective than broad. The currencies most exposed to this debate are USD, JPY, CAD and EUR.
Scenario Map
- Base case (60%): Inflation continues to cool gradually while oil remains elevated but stable. Markets maintain expectations that the Fed stays on hold, Treasury yields remain contained and FX trades without a major trend change.
- Risk-on scenario (25%): Oil eases, geopolitical tensions cool and incoming data supports the view that inflation is moving lower without damaging growth. Equities recover further and higher-beta currencies receive broader support.
- Risk-off escalation scenario (15%): Middle East tensions intensify, oil extends its rally and inflation expectations move higher again. Treasury yields rebound, defensive assets strengthen and volatility rises across FX markets.
What Changed Since Last Week
The biggest shift was not the softer inflation data itself. It was the market's reaction.
Fed rate expectations moved noticeably lower, Treasury yields eased and the dollar finished the week softer despite resilient U.S. economic data. At the same time, oil became a much larger macro story than it was a week ago. That weakens the idea that the inflation battle is already over.
Geopolitics
The conflict involving the United States and Iran remains the biggest external driver for markets. Supply risks around the Strait of Hormuz continue supporting oil prices, even though physical disruption has remained limited so far.
That matters because oil affects much more than energy markets. Higher energy prices influence inflation expectations, government bond yields and central bank communication. It is no longer just an oil story.
Macro Calendar
The week ahead
- Canadian CPI: An important test of whether higher energy prices are beginning to rebuild domestic inflation pressure.
- New Zealand CPI: Markets want to know whether inflation continues cooling without confirming a sharper economic slowdown.
- UK CPI: Sterling faces one of its biggest domestic events of the month as traders assess whether services inflation remains stubborn.
- European Central Bank meeting: Markets broadly expect rates to remain unchanged. The focus will be on how policymakers discuss inflation, oil prices and the possibility of further action later this year.
- Australian employment report: Labour market resilience remains central to expectations around the Reserve Bank of Australia.
- Global flash PMIs: Probably the most important broad growth indicator of the week. They should show whether higher energy costs are already affecting business activity across the major economies.
Currency Outlooks
⚖️ USD - Softer, but not broken
The dollar finished last week weaker after softer CPI and PPI reduced expectations of another immediate Fed increase.
The mistake here would be assuming that automatically creates a sustained dollar downtrend. Oil is supporting inflation expectations, U.S. data remains resilient and geopolitical uncertainty continues creating defensive demand.
The cleaner read for me is that USD risks remain balanced. The policy story has softened, but the safe-haven story is still alive.
⚖️ EUR - Waiting for the ECB
The euro has benefited mainly from dollar weakness rather than a dramatic improvement in Europe's own outlook.
The ECB becomes this week's main event. Markets will pay close attention to how policymakers discuss energy prices and inflation persistence. Europe remains more exposed to higher imported energy costs than the United States.
Risks stay balanced until that message becomes clearer.
🔺 GBP - Domestic data now matters more
Sterling has quietly been one of the stronger major currencies over recent weeks.
This week becomes more about the UK than the United States. Inflation data needs to support current Bank of England expectations without creating fresh concerns about slowing growth.
Risks lean toward relative strength while domestic data remains supportive.
🔺 CAD - Oil keeps the advantage
CAD enters the week with one of the strongest macro tailwinds among the major currencies.
Higher oil prices continue supporting Canada's external position, although the reason behind the oil rally remains geopolitical rather than demand-driven. Canadian inflation data will determine whether that support becomes even stronger or starts complicating the Bank of Canada's outlook.
🔺 CHF - Defensive demand remains supportive
The franc continues benefiting from a cautious market environment.
As long as geopolitical risks remain elevated and uncertainty around inflation persists, CHF should continue finding support as a defensive currency.
🔻 JPY - Yield differentials still dominate
The yen remains the weakest major currency.
Lower U.S. yields have helped slightly, but Japan's yield disadvantage continues dominating the bigger picture. Intervention risk has not disappeared and remains an important source of headline volatility.
I would not underestimate that risk simply because USD/JPY has stopped accelerating.
⚖️ AUD - Waiting for employment
AUD has recovered alongside weaker U.S. yields but now faces an important domestic labour-market test.
Employment data should determine whether the Reserve Bank of Australia maintains its cautious stance. Slower Chinese growth continues limiting broader enthusiasm.
⚖️ NZD - Inflation takes centre stage
New Zealand's inflation report becomes the week's defining domestic event.
NZD has benefited from the softer dollar environment, but stronger domestic inflation could become the next important driver. The outlook remains balanced until those numbers arrive.
Cross-Asset Wrap
- 🪙 Gold: Gold is trading around $4,000, consolidating after recovering from last week's lows. Softer U.S. inflation has supported lower real yields, while stronger oil prices continue creating longer-term inflation uncertainty. Watch whether the ECB meeting and global PMIs shift expectations for bond yields. [USD] [REAL YIELDS] [INFLATION]
- 🥈 Silver: XAG/USD is trading around $56, stabilising after a volatile week. Lower yields remain supportive, while slower global growth expectations continue weighing on the industrial-demand outlook. Watch whether flash PMIs strengthen or weaken the growth story. [INDUSTRIAL DEMAND] [USD] [YIELDS]
- 🛢 Oil (Brent): Brent is trading around $85 per barrel, close to its strongest levels in several weeks after renewed Middle East tensions. Supply risks remain the dominant driver, while markets continue monitoring shipping through the Strait of Hormuz. Watch for any geopolitical developments that either reduce or increase the current risk premium. [SUPPLY] [GEOPOLITICS] [INFLATION]
- 📈 Stocks: Global equity markets enter the week on a cautious footing after technology weakness offset some of the optimism created by softer U.S. inflation. Lower bond yields remain supportive, although higher oil prices continue limiting broader risk appetite. Watch whether earnings and flash PMIs improve confidence beyond the technology sector. [EARNINGS] [YIELDS] [RISK]
- ₿ Crypto: Bitcoin is trading around the low-$63,000 region, remaining relatively stable despite increased macro uncertainty. Liquidity conditions have improved modestly alongside lower yields, although crypto continues responding closely to broader risk sentiment. Watch whether risk appetite improves enough for digital assets to build on recent stability. [LIQUIDITY] [REAL YIELDS] [RISK]
The main thing I care about this week is whether markets can continue believing inflation is moving in the right direction while oil keeps moving in the wrong direction.
The mistake here would be becoming too confident after one good week of inflation data. Central banks still have work to do, energy remains an important risk and geopolitical headlines can change sentiment very quickly.
I would not overcomplicate this. The cleaner read for me is to keep watching three things together: oil, Treasury yields and the dollar. If those three continue moving in the same direction, the broader FX picture becomes much clearer. If they start sending different signals again, expect another week where selective opportunities matter much more than broad market themes.
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This is general, educational macro and FX commentary. It is not investment advice and not a trading signal.
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