Iran escalation resumed overnight: The US launched fresh strikes on Iran; Iran retaliated against five Gulf states; both sides are disputing whether the Strait of Hormuz remains open. Oil jumped more than 4% above $79.
US CPI tomorrow at 13:30 BST: The week's defining moment – with oil prices elevated, there is a genuine risk the headline number beats consensus. Fed Chair Warsh testifies the same day.
Dollar is our highest-conviction call: 80% conviction for a stronger dollar against both sterling and the euro – every input is aligned.
Recap
Friday's session was a holding pattern ahead of this week's data: all three primary pairs moved less than 0.1%; the real story arrived over the weekend with Iran.
Buying yen got more expensive: GBPJPY fell 0.44%; UK businesses buying yen paid approximately £1,100 more per £250k; sellers of yen benefited by the same amount.
Buying Norwegian krone got cheaper: GBPNOK rose 0.53%; businesses buying krone saved approximately £1,325 per £250k; sellers of krone received £1,325 less.
Traders are the most bullish on the dollar since 2015 – speculative dollar long positions reached approximately $40.4 billion; positioning this stretched means a reversal on softer data would be sharp.
Our thoughts
The US launched multiple waves of strikes against Iran overnight; Iran retaliated against five Gulf states; Brent crude jumped more than 4% above $79. Higher oil feeds directly into US inflation expectations, which raises the probability the Fed raises rates – a dynamic driving the dollar higher this morning. Tomorrow's US CPI at 13:30 BST, followed by Fed Chair Warsh's first congressional testimony, is the most important 24-hour window of the week.
EURUSD
Near term – 80% conviction, stronger dollar. US rates run more than one and a half percentage points above eurozone equivalents, US manufacturing is running meaningfully ahead, the Fed is nearly three times more likely to hike at its next meeting than the ECB, and the Iran escalation adds safe-haven weight to every other argument. What limits conviction: dollar positioning is at its most stretched since 2015 – a softer CPI tomorrow could trigger a sharp reversal, and ECB hawks including Nagel and Kaasik have flagged another rate hike remains possible at the 23 July meeting.
Medium term – 80% conviction, stronger dollar. The rate and growth advantage is durable and unlikely to close quickly, even if the ECB hikes on 23 July.
What this means for you. If the euro falls to the level where it found buyers three times last month, buying $250k costs approximately £2,080 more than Friday's close; sellers benefit by the same. If it recovers to the ceiling that has capped every rally for six weeks, buying $250k costs approximately £1,751 less; sellers are worse off. The downside is modestly larger than the upside – consistent with our strong conviction for dollar strength.
GBPUSD
Near term – 80% conviction, stronger dollar. The Fed is materially more likely to raise rates at its next meeting than the Bank of England, traders are paying to protect against sterling falling, and tomorrow's CPI and Warsh testimony create asymmetric upside risk for the dollar – a hot print or hawkish tone amplifies the move already underway.
Medium term – 67% conviction, stronger dollar. UK and US short-term rates are effectively identical – any shift in the relative policy outlook could close the gap quickly and is the primary reason conviction steps back at this horizon.
What this means for you. If sterling falls to the level where it found buyers twice during June's sell-off, buying $250k costs approximately £2,239 more than Friday's close; sellers benefit by the same. If sterling recovers to the ceiling the market has rejected on each approach this month, buying $250k costs approximately £1,493 less; sellers are worse off. The downside is roughly one and a half times the upside.
GBPEUR
Near term – 35% conviction, lean toward stronger pound. The UK rate advantage over the eurozone is substantial and traders show no strong lean in either direction. But the macro picture is balanced, the geopolitical backdrop affects both currencies equally, and this is a lean, not a view.
Medium term – conflicted, no view assigned. The rate advantage favours the pound, but ECB hawks are active and the 23 July meeting introduces genuine asymmetric risk. We are naming that conflict honestly rather than forcing a direction.
What this means for you. If sterling falls to the base of the range it has held since April, buying €250k costs approximately £1,917 more than Friday's close; sellers benefit by the same. If sterling pushes to the level it has tested three times without closing above, buying €250k costs approximately £1,704 less; sellers are worse off. The asymmetry is roughly symmetric – the ECB meeting on 23 July is the event most likely to break this range.
BOTTOM LINE
The dollar is our highest-conviction call this week – Iran, rates and growth all aligned at 80%. Tomorrow's US CPI at 13:30 BST is the moment that either confirms or challenges that view. Know your exposure before it lands.
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