The US Dollar softened at the start of the week as easing Middle East tensions and a retreat in Brent Oil below USD 90 reduced energy-driven inflation fears, leading to a slight decrease in market-implied odds of a near-term Federal Reserve (Fed) rate hike. On Friday, the US rate market had priced in almost 10 basis points of hikes for this week's policy meeting, but this dropped to around 8 basis points after positive geopolitical developments over the weekend. MUFG expects the Fed to keep rates on hold this week but does not fully rule out a hike, noting that a hawkish surprise could give the US Dollar renewed upward momentum [1].
The EUR/USD pair resumed its decline after failing to break above the intraday high of 1.1418, with the US Dollar Index (DXY) trading almost 0.2% higher near 1.1395 during European trade. The US Dollar initially started the week lower due to diminished safe-haven demand following the pause in US-Iran military aggression. Investors are focused on the Fed's monetary policy announcement on Wednesday, with expectations that rates will remain unchanged in the 3.50%-3.75% range and no new guidance, though the Fed may warn of upside inflation risks. Eurozone inflation data due Friday will influence European Central Bank (ECB) rate expectations, as officials remain concerned about persistent inflation pressures. Technical analysis shows EUR/USD faces resistance at the 20-day EMA around 1.1420 and support at 1.1381, with a mildly bearish near-term tone [2].
HSBC strategists highlight that the ECB's cautious, data-dependent stance and lack of commitment to further rate hikes have weakened support for the Euro. The ECB held rates at 2.25% on July 23 and reiterated its meeting-by-meeting approach, which, combined with weak eurozone growth, rising energy costs, and deteriorating terms of trade, could increasingly weigh on the Euro against the US Dollar. While higher yields have recently supported EUR/USD, this is seen as fragile and likely to fade without a firmer ECB commitment [4].
In the UK, ING expects the Bank of England (BoE) to leave rates unchanged this week, with a 7–2 vote as the base case, though there is a possibility Catherine Mann could join Huw Pill and Megan Greene in supporting a hike. Contained inflation projections would strengthen the case for rates to remain on hold for the rest of the year, potentially forcing markets to unwind some of the 38 basis points of tightening priced by year-end and creating downside risks for Sterling. The rebound in EUR/GBP, now 1% above the July 15 low of 0.8455, is expected to have further room to run [3].
Regarding Sweden, Rabobank notes that benign CPI and CPIF inflation have allowed the Riksbank to delay rate hikes compared to G10 peers, despite supply disruptions from the Iran war. However, as VAT effects fade and growth data improve, markets are pricing in 30 basis points of Riksbank tightening over the next six months. The IMF's July staff report concluded that Sweden's cyclical economic recovery is ongoing, and the Riksbank's recent guidance indicated an increased probability of a rate hike later this year. Rabobank expects EUR/SEK to range trade near term, with a moderately firmer Swedish Krona into year-end [5].
CONCLUSION
Central bank policy uncertainty and shifting inflation dynamics are driving cautious trading in major currencies. The US Dollar's direction hinges on the Fed's upcoming decision, while the Euro and Sterling face downside risks from dovish central bank stances and fragile economic outlooks. Market participants remain focused on key policy meetings and inflation data for further direction.