US
USD is mixed with the oil-sensitive NOK and CAD underperforming. Brent crude oil prices dropped under $90 a barrel. According to the New York Times, the State Department is preparing to send US diplomats back to embassies in the Middle East that were evacuated before and during the war with Iran. The move makes a renewed escalation even less likely and is supportive of risk assets.
“Economic D-Day” turned out to be more of a warning shot than a decisive blow. The US expanded sanctions on Iran but stopped short of any immediate secondary sanctions against other countries sustaining Iran’s trade. China is the critical pressure point - it is Iran’s largest trading partner and buys roughly 90% of its oil exports – and the biggest constraint on making the sanctions credible.
The US would have to target major Chinese banks and refiners, risking financial disruption, Chinese retaliation, and the fragile US-China détente. Treasury Secretary Scott Bessent remarks “Why would I want to blow up the global financial system?” exposes Washington’s limited tolerance for economic pain.
Richmond Fed President Tom Barkin (2027 voter) speaks on the economy (1:00pm London, 8:00am New York) followed shortly after by the ADP private employment change for the week ending August 8 (1:15pm London, 8:15am New York). While the weekly ADP is poor at predicting monthly NFP change, it does a better job at capturing the broad direction of travel. It currently points to cooling labor demand.
August Conference Board Consumer Confidence index will also be of interest (3:00pm London, 10:00am New York). Pay attention to the job subindexes which are currently consistent with a labor market in balance. “Jobs plentiful” minus “jobs hard to get” has edged closer to zero while employment in six months’ time has improved.
We continue to anticipate the DXY index to trade within a 96.00-100.00 range in the next few months. The tailwind to USD from the widening US growth edge relative to other major economies is offset by the risk of a dovish Fed repricing and worsening US fiscal credibility.
EUROZONE
EUR/USD is firmer but holding under 1.1700. Germany’s IFO business climate survey improves more than expected in August. Headline rose to a one year high at 88.8 (consensus: 87.2, July: 86.7) driven by more favorable current conditions and expectations. The increase echoes the recovery signaled by the Eurozone’s August PMI and ZEW surveys.
Bottom line: improving Eurozone economic activity and above target inflation reinforces the case for the ECB to resume raising rates at the September 10 meeting (95% priced-in). By contrast, Fed risks remain tilted toward a dovish repricing. A widening EU-US rate gap underpins the end-July upswing in EUR/USD. Important resistance sits near 1.1800 with immediate support offered at the 200-day moving average of 1.1632.
AUSTRALIA
AUD ignored the release of the RBA August meeting Minutes. The Minutes reinforced Governor Michele Bullock’s warning that another rate hike was “quite possible.” According to the Minutes “Several members judged that it was quite possible that the upside risks to the inflation forecast would crystallise, requiring some further tightening.”
RBA cash rate futures continue to imply 60% odds of one final 25bps hike by year end to 4.60%. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle because policy is already somewhat restrictive. Still, Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds.
HUNGARY
National Bank of Hungary (MNB) is widely expected to deliver a third straight 25bps rate cut to 5.50% (1:00pm London, 8:00am New York). In July, the bank stressed it “sees room for further interest rate cuts throughout the summer, with a decision on the continuation to be made based on the September Inflation Report.” MNB’s guidance to keep real interest rate positive and Hungary’s government plan to meet euro adoption conditions by 2030 are important tailwinds for HUF.
