The escalation of the Middle East war sent oil prices sharply higher and pulled interest rates up, too. September WTI rose by more than 10% for a three-week increase of more than 25%. Neither side seems prepared to back down. However, judging by the largest spread this year (~$11) between the September WTI and the December contract suggests many participants suspect the current high level of stress will not be sustained. Yet, reports of the movement of munitions and people are consistent with a dramatic escalation. Moreover, last week, for the first time in the conflict, the Houthis struck ships in the Strait of Bab-el-Mandeb. At the same time, there are two other disruptive forces. First is the US tariff regime. The US has replaced the expiring Section 122 tariffs (balance of payments) with Section 301 tariffs (lax forced labor standards). But in addition, in recent weeks the US threaten 25% tariffs on Brazil, 50% on Canada (and no USMCA compliant exemption) and announced a 100% tariff on generic drugs in two years (to induce the production in the US).
The highlights for the week ahead include three G10 central bank meetings: The Federal Reserve, the Bank of England, and the Bank of Japan. The rise in oil prices spurred boosted speculation that the Fed could raise rates. The derivatives market has about a 33% chance of a hike discounted but has the moved fully discounted for the next meeting in September. The market sees the Bank of England on hold. And while the odds of hike at the September meeting eased a little, a move is fully discounted in Q4. The swaps market shows practically no chance of a BOJ hike. Earlier in the cycle, Governor Ueda was criticized for not preparing the market sufficiently. There has been no preparation now. The odds of a hike in October increased to a little more than 80% from around 70% a week ago.
US
Drivers: The dollar continues to be sensitive to changes in short-term interest rates. The 30-day correlation between changes in the Dollar Index and the December Fed funds futures contract is around -0.63. It has been fairly stable. The 60-day correlation is around -0.69. Changes in the Dollar Index and the US two-year yield are around 0.65 correlated over the past 30-day, while DXY correlation with the US 10-year yield is slightly above 0.50.
Data: There are two highlights in busy week ahead. The first is the FOMC meeting that concludes on July 29. Given that some officials have been edging toward a hike and the jump in oil prices, the odds of a rate hike have risen from about 14% on July 17 to about 33% before the weekend. The other highlight is the first estimate of Q2 GDP, which is due the day after the FOMC meeting. The Atlanta Fed's GDP tracker has diverged from the Bloomberg survey. The Atlanta Fed's model puts growth at 1.3% while the median forecast in Bloomberg's survey is 2.5%. The former warns of slower growth after 2.1% in Q1 26, while the latter anticipates a slightly strong pace. Other real sector data out, such as durable goods orders and shipment, June goods trade, retail, and wholesale inventories will feed into Q2 GDP forecasts.
Prices: Rising rates helped lift the Dollar Index to its highest level since July 1 on July 23 (~101.55). It consolidated ahead of the weekend. The momentum indicators are turning up. With the US seen as among the most able to cope with the disruption of the war in the Middle East, the Dollar Index looks poised to move to new highs for the year in coming days. A move above the 101.80 seen in June 24 would target 102.00 (May 2025 high) and then the 102.70 area, the (50%) retracement of the losses from the 2025 high set last February (~109.90).
EMU
Drivers: Over the past 30 sessions, changes in the euro are inversely correlated to changes in the US December Fed funds futures and the US two-year yield by about -0.65. The euro is more sensitive to changes in US short-term rates than German short-term rates, though it is inversely correlated with the German two-year yield. The euro is less sensitive to changes in the longer end of the US curve, but from the first time since the end of February, the euro's 30-day rolling correlation with changes in Germany's 10-year yield has turned positive.
Data: This week's two highlights are in the second half of the week. On July 30, the eurozone provides its first estimate of Q2 GDP. It is seen strengthening to 0.2% quarter-over-quarter. Recall that Q1 26 GDP was revised to -0.2% in June from 0.1% flash estimate (April). The revision was almost entirely a function of developments in Ireland. Ireland's Q1 GDP was initially estimated at 2% growth. The final figure came in at -12.1%. The culprit was Ireland's multinational-dominated sector, which contracted 27.1% in the quarter, as pharma and tech firms unwound the export front-loading in 2025 to beat U.S. tariff deadlines. Domestic Irish activity actually grew by up 0.6% in the quarter. The second highlight is the preliminary July CPI. The risk is that higher oil prices, after a four-month slide, will lift the CPI after a 0.1% decline in June. The year-over-year rate is likely to rise back above 3% from 2.8% in June. Before last week's ECB meeting, the market was confident that another rate hike will be delivered in September, and nothing President Lagarde said dissuaded the market expectations.
Prices: The euro's high this month, ~$1.1485, was recorded on July 15 after softer US inflation gauges. However, the surge in US rates dragged the euro to $1.1365 on July 23, a few hundredths of a cent above the low for the month set July 1. The momentum indicators are curling lower and a return to the low for the year (~$1.1325) seems increasingly likely. This area corresponds to a (38.2%) retracement of the euro's rally from the February 2025 low (~$1.0140). The next retracement (50%) is a little above $1.11. That is not a forecast at this point but identified to illustrate the significance of the recent lows and the potential of a convincing break.
PRC
Drivers: Changes in the dollar against the offshore yuan have become somewhat less correlated with the changes in the Dollar Index. The rolling 30-day correlation has eased from the year's high in late April from almost 0.90 a little more than 0.52 now. It is around levels seen in March. Since early May, the correlation between changes in the dollar against the offshore yuan and China's CSI300 equity index has been inverted (the offshore yuan tends to appreciate when Chinese equities rise). The exchange rate is not sensitive to changes in China's one-year yield. The 30-day correlation has moved between around -0.30 and +0.20 this year and is now about -0.10.
Data: China reports June industrial profits and the July PMI. Industrial profits rose 21.1% year-over-year in May. In May 2025, they had fallen by 9.1% year-over-year. In May 2024, they were virtually flat. For some context, consider that US corporate profits rose by about 12.8% in Q1 26 year-over-year and 5.5% in Q1 25. The June PMIs give some hope that as the quarter ended the economy was finding some traction. The June manufacturing PMI stood at 50.3, up from 50.0 in May. The Q1 high of 50.4 was the highest since March 2025. The non-manufacturing PMI stood at 50.2, which is the highest for the year so far, but simply returned to where it was at the end of last year. The 50.6 composite reading is also the year's high. It fell below 50 in January and February. China's Politburo meeting in the last week of July is expected to evaluate second-quarter economic performance, set the macro policy tone for the second half of 2026, and guide the rollout of the opening year of the 15th Five-Year Plan.
Prices: The dollar looks rangebound against the offshore yuan. The range seems to be about CNH6.7635-CNH6.7815. The 20-day moving average is around CNH6.7845 and a move above there could target the July high (~CNH6.81). The 20-day moving average of the dollar against the onshore yuan is ~CNY6.7815 and the July high is about CNY6.8060.
Japan
Drivers: A common claim is that if the BOJ would only hike rates a little faster that the yen would find support. Yet, the correlations suggest otherwise: that the influence of US rates is greater than Japanese rates or the interest rate differential. The dollar-yen correlation with US changes in the US two-year and 10-year yields over the past 30 days is around 0.44 and 0.32, respectively. Changes in the exchange rate and Japan's two- and ten-year yields is around 0.06 and 0.19, respectively. Changes in the dollar-yen and the two-year rate differential are about 0.32 correlated and with the 10-year differential, the 30-day correlation is slightly inverted for the first time this year.
Data: The highlight of the week is the Bank of Japan meeting that concludes on July 31. The issue is not whether it will hike rates. It is nearly a foregone conclusion it will not after it delivered a 25 bp hike last month. However, it will also provide updated forecasts, which would ostensibly lay the groundwork for another hike later this year. After recording its fastest growth in three years in 2025 (1.1%), Japan's economy is expected to slow to 0.5% this year and 0.7% next year, according to the April forecast. There is some speculation that officials will upgrade their forecasts. However, the economy appears to have lost some momentum after the 1.8% annualized rate in Q1 26, which was bolstered by stronger net exports and stronger consumption. Q2 GDP will be reported on August 17, and the early forecasts are for 0.2% (annualized), according to the median forecast in Bloomberg's survey. This week's industrial production and retail sales will help economists update their forecasts. Slightly before the outcome of the BOJ meeting, Tokyo's July CPI will be reported. Tokyo's CPI is reported a few weeks ahead of the national figure but does a decent job anticipating the national forces. The BOJ targets CPI core rate at 2%. Tokyo's core rate has not been above the target this year and neither has the national core.
Prices: The dollar reached almost JPY164 last week, a new 40-year high. Official rhetoric has not escalated. Since the high was recorded on July 23, the dollar has not traded below JPY163.65. Additional support may be around JPY163.25. A surprise rate hike by the BOJ next week could see the yen spike higher, but as the correlation work shows above, the exchange rate is more sensitive to US rates. A rate hike followed by intervention could have more meaningful impact, and explicit support by the US, could also be helpful. However, this does not seem like a high-probability scenario.
UK
Drivers: The Burnham government is taking shape. Many observers are not convinced that the corner has been turned on the political conditions that have produced now seven prime ministers in a little more than a decade. Sterling's rolling 30-day correlation with changes in the euro has eased to around 0.82 from a peak in May of almost 0.94. Sterling's 30-day inverse correlation with US two-year yield bottomed in mid-June near -0.80 and is now around -0.60. Sterling is slightly inversely correlated with changes in two-year and 10-year UK yields.
Data: The UK reports consumer credit and mortgage lending on July 29, but the highlight of the week is the Bank of England meeting the following day. The swaps market is pricing in a little less than a 10% chance of change in policy. The BOE last cut the base rate by 25 bp to 3.75% at the end of last year. In both Q3 25 and Q4 25, the British economy grew by 0.1% quarter-over-quarter. It jumped to 0.6% in Q1 26, but that is not sustainable and Q2- growth looks to be about 0.2% (due August 13). CPI averaged 3.8% in Q3 25 and 3.4% in Q4 25. Inflation average 3.1% Q1 26 and slightly below 2.8% in Q2. The swaps market has around a 65% chance of a hike at the BOE meeting in September.
Prices: Sterling reached almost $1.3560 on July 15, its highest level in a little more than two months. It fell for the following six sessions and reached $1.33, which is the (61.8%) retracement of sterling's rally from the June 24 low, which is also the year's low (~$1.3140). It held below $1.3350 ahead of the weekend. With the momentum indicators turning lower, the risk may be on the downside, unless sterling can regain a foothold above the $1.3400 area.
Canada
Drivers: The most important driver of the USD-CAD exchange rate appears to be changes in the US two-year premium over Canada. The 30-day correlation is a little below 0.75, the highest since Q1 18. The correlation of the exchange rate and changes in the two-year US yield is near 0.40. The correlation between changes in the exchange rate and Canada's two-year yield is slightly inverse for the first time since mid-March (~-0.06).
Data: Sometimes, at the risk of confusing investors if not policymakers, the US reports the establishment and household labor surveys at the same time. The results are not always congruous. Canada separates the two reports and with a lag. On July 30, it will report May's establishment survey. The May household survey showed an almost 88k increase in overall employment, with an outsized surge of 154k full-time posts. The following day, Canada reports May monthly GDP. The economy contracted by 1.0% at an annualized rate in Q4 25 and another 0.1% in Q1 26, but Q2 is off to stronger start with a 0.5% expansion reported in April. The Bank of Canada projects Q2 growth around 2.5%, while the median in Bloomberg's survey is for 1.9%.
Prices: The US dollar held barely above CAD1.40, a new low for month, at the start of last week and never looked back. The greenback posted a key upside reversal last Monday and rose to a new high at the end of the week, a little above CAD1.4115. The CAD1.4125 area marks the halfway point of this month's range. The 20-day moving average is near CAD1.4135 and chart resistance is seen in the CAD1.4150-CAD1.4155 area. The momentum indicators look poised to turn higher early next week.
Australia
Drivers: The Australian dollar is sensitive to the broad direction of the US dollar. The 30-day correlation between changes in the Aussie and the Dollar Index is around -0.63. Over the past 30 sessions, the Australian dollar slightly less correlated to gold (-0.58) as with DXY. The 30-day correlation of changes in the Australian dollar and the two-year US yield is around -0.50. The Aussie is positively correlated with changes in Australia's two-year yield (~0.23).
Data: Australia reports June and Q2 CPI. The 0.7% decline in May will not be repeated, and given the base effect, the risk is that the year-over-year pace moves above 4%. It peaked at 4.6% in March. Central bank officials put more emphasis on the quarterly reading. CPI rose 1.4% in Q1, which matched the most since the end of 2022. The Q2 CPI is expected to rise by half as much. Australia will also report June private credit growth. It has risen by an average of 0.65% in the first five months of the year, compared with a 0.56% average increase in the first five months of last year and 0.48% in the Jan-May 2024 period to a 0.65 average After delivering three rate hikes earlier this year, the Reserve Bank of Australia is on the sidelines. It has not ruled out additional hikes, but the market is not convinced, especially at next month's meeting (August 11). The futures market has about a 1-in 3 chance of a hike discounted. Still, the market has another hike fully discounted at the November meeting.
Prices: The Australian dollar was bid to a new high for the month, slightly above $0.7025, early last week before being sold to a marginal new low for the week on July 23. It stabilized before the weekend but could not recapture $0.7000. This month's up trendline is found near $0.6955 at the start of the new week and about $0.6975 at the end of next week.
Mexico
Drivers: The 30-day correlations show that the Mexican peso is a better proxy for the JP Morgan Emerging Market Currency Index (~-0.73) than the major currencies in the Dollar Index (~0.64). The 30-day correlation between changes in the exchange rate and the two-year US yield is near 0.50. It peaked near 0.80 in mid-June, which was the highest in more than three decades. The 30-day correlation of changes in the exchange rate and Mexico's two-year yield is also positively correlated near 0.47. This year's peak in February was near 0.70, the highest since September 2022.
Data: There are two highlights for Mexico in the coming week. First, Mexico reports the June trade balance on July 27 and then Q2 GDP on July 30. Mexico's trade surplus has grown through May this year. In the first five months, Mexico recorded at trade surplus of almost $5.77 bln compared with a $918 mln surplus in the Jan-May 2025 period, and an $8.51 bln deficit in the same period in 2024. Second, on July 30 Mexico reports Q2 GDP. The economy likely rebounded. After contracting by 0.6% in Q1 26, the economy is expected to have grown by 0.6% in Q2, according to the median forecast in Bloomberg survey. The median projection is for a similar pace of growth here in Q3.
Prices: The US dollar continues to trade choppily in a new and higher range against the Mexican peso. From early May through late June, the greenback was in a roughly MXN17.16-MXN17.50 range. In the past month, it has been around a MXN17.37-MXN17.65 range. Last week, it found support near the lower end of the new range and peaked near MXN17.55. Although the momentum indicators are not generating strong signals, it remains vulnerable to a further escalation and broadening of the Middle East war and a risk-off environment. The Colombian peso, backed by a 12% policy rate and favorable political development, led the regional currencies with a nearly 2% advance last week. It reached its best level since 2020 ahead of the weekend.
Reviewed by Marc Chandler
on
July 25, 2026
Rating:
