Currencies Outlook

Note: This week, instead of separate Currencies and Interest Rate Outlook publications, we're issuing one combined report covering both topics, due to the summer holiday period.

Higher oil prices increase inflation risks and raise the likelihood that central banks will need to tighten monetary policy further. We discuss the implications for U.S. and European interest rates, EUR/USD and the other major currency pairs.

The US economy is less sensitive to rising energy prices than the European economy, and expectations of rate hikes by the Fed have increased. Yet, despite these supportive factors, the EUR/USD remains remarkably stable. In this FX update, we examine the reasons behind this resilience and explain why we nevertheless expect the EUR/USD to weaken further.

Trump’s popularity has fallen sharply and he will have to pull out all the stops if the Republicans are to retain control of Congress in the mid-term elections in November. This means he does not want a war with Iran and wants to keep oil prices low. Iran is exploiting this by keeping up the pressure to force concessions from the US. This, in turn, makes Trump more unpredictable, and this is likely to continue to influence the currency markets for some time.