CAPITALDIGEST MARKET REVIEW, 20-07-2026

DOLLAR DRIFTS AS US-IRAN CONFLICT INTENSIFIES; STERLING INCHES HIGHER

The dollar was broadly steady on Monday as cautious investors watched out for signals on ​the direction of the Iran war, while the pound edged higher as markets prepared for new British Prime Minister Andy Burnham. The ‌dollar index , which measures the greenback’s strength against a basket of six currencies, was little changed at 100.78. Iran’s Revolutionary Guards said on Monday they had struck U.S. military assets across the Middle East after another night of U.S. bombardment of Iranian cities, in a conflict, opens new tab that has disrupted energy supplies and stoked ​fears of global inflation. “Markets, I think, have become somewhat more comfortable with the range of risks to be priced ​in and until something happens that catches traders by surprise, we’re just not going to see ⁠a huge amount of volatility for the Middle East,” Nick Rees, head of macro research at Monex Europe, said. “It’ll keep markets ​nervous. It’ll keep markets cautious. But I think we’re really going back to where we were, not in April, but in May, ​where volatility ground lower, because we saw just a general lack of conviction on where things were going to trade next,” he said. Brent crude futures were last a touch higher at $88.43 a barrel, having risen above the $90 mark earlier in the day.

STERLING DIPS BUT ON TRACK FOR WEEKLY RISE AS BURNHAM POISED FOR POWER  

The pound slipped on Friday but was on track for its third consecutive weekly rise, with UK assets supported in recent days by reports that incoming prime minister Andy Burnham has chosen a centrist to be finance minister. Sterling was last down 0.2% at $1.345, as it gave back some of its sharp gains on Wednesday and as the safe-haven U.S. dollar found some support from ongoing strikes in the Middle East. Yet it remained set to rise 0.4% this week after rallying on Wednesday when newspapers, including the Financial Times, reported that Burnham was likely to pick Shabana Mahmood finance minister over the more left-leaning Ed Miliband. as his Traders took news of the likely appointment as a sign that Burnham, who is set to become leader of the governing Labour Party on Friday and prime minister next Monday, is not planning to ramp up spending as some investors had originally feared. Government bonds rallied along with the pound, which has also been helped by a dip in the dollar this week. UK political developments have shifted from a headwind to a tailwind, with an orderly leadership transition and expectations of a fiscally prudent chancellor boosting market confidence,” strategists at UBSWealth Management said in a research note. The pound also retraced some of its recent rally against the euro on Friday, with the common currency up 0.15% to 85.03pence. Yet the euro was still on track for its fourth straight weekly decline against the pound, with sterling helped by greater political certainty and better-than-expected UK growth figures. However, ING currency strategist Francesco Pesole said the pound looked somewhat over-valued after rising to a 13-month high against the euro. Pesole said British bond yields could fall, knocking the attractiveness of the pound, if markets scaled back their bets for around 35 bps of Bank of England rate hikes this year, which he said looked too high.

DOLLAR HOLDS STEADY ON SAFE-HAVEN DEMAND, ENDS DOWN ON THE WEEK 

The dollar was flat on Friday but ended the week lower as tame U.S. inflation data led traders to cut bets on imminent rate hikes from the Federal Reserve. Iran and the United States exchanged intensifying fire in a week-long escalation that has largely unravelled last month’s truce, spurring safe-haven bids for the dollar and pushing oil prices to near one-month highs. “The tech-led global equity market plunge and ongoing disruption to Strait of Hormuz traffic have triggered a flight to safety,” said Elias Haddad, global head of markets strategy at Brown Brothers Harriman. “USD recovered some of this week’s losses, and global bond yields edged a bit lower.” The dollar index <= USD>, which measures the U.S. currency against six other units, was weekly drop of 0.2%. at 100.76, set for a The index hit a one-month low earlier this week on easing chances of a near-term rate hike, but safe-haven flows have helped support the greenback. The euro remained flat at $1.1436, putting it at a 0.2% rise in the week. Sterling fell 0.2% to $1.3455 but posted its third straight week of gains following UK economic growth figures and expectations for greater political certainty with incoming Prime Minister Andy Burnham reportedly set to pick a centrist finance minister. The Australian dollar ended with a third week of gains, although it was 0.23% softer on the day at $0.6980as risk-off sentiment prevailed, with global stocks falling on Friday. U.S. consumer sentiment climbed to a five-month high in July, although traders said the respite may prove temporary with renewed conflict in the Middle East driving up gasoline prices. THE RISK OFINTERVENTION The Japanese yen was flat, fetching 162.44per U.S. dollar, remaining rooted near the 40-year low of 162.84it touched at the start of the month. Traders remained wary of official intervention from Tokyo after Japanese Finance Minister Satsuki Katayama reiterated the government’s readiness to take decisive action. “It would appear from the threat of decisive action that intervention is once again very close,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. “I don’t know that that’s going to have any more of an impact on the yen than it’s had previously.” ECONOMIC RESILIENCE U.S. retail sales rose slightly in June as lower gasoline prices weighed on receipts at service stations. But online spending surged, prompting economists to upgrade their second-quarter growth estimates. The economy’s resilience was underscored by other data also showing labour market stability. Economists believe the Federal Reserve will keep interest rates unchanged later this month after data showed consumer price inflation had cooled in June. Yet policymakers are wary of banking too heavily on one month of improvement after months when inflation moved in the wrong direction. Chances for a Fed hike in July stood at 14%, versus a 25% implied probability last week, according to the CME FedWatch tool. Traders are pricing in 30basis points of hikes by December. “That looks still very rich to me,” said Osborne. “We’ve probably seen, at least for now, the peak in the dollar a couple of weeks ago or so.” Reporting by Laura Matthews in New York; additional reporting by Harry Robertson in London and Ankur Banerjee in Singapore; Editing by Shri Navaratnam, Sam Holmes, Susan Fenton, Joe Bavier and Colin Barr. 

STERLING HOVERS AROUND TWO-MONTH HIGH AS FISCAL CONCERNS EASE 

Sterling hovered near its highest level in more than two months against the dollar, and edged lower versus the euro, as concerns over Britain’s fiscal outlook faded. Andy Burnham is expected to appoint interior minister Shabana Mahmoodas finance minister when he becomes Britain’s prime minister next week, rather than the more left-leaning energy minister, Ed Miliband, easing concerns about fiscal discipline. Britain’s economy eked out minimal growth in May as the services industry expanded but other sectors shrank, suggesting fragile confidence among businesses. The greenback was little changed against major currencies as the impact of cooling inflation on U.S. rate expectations offset risks of a further spike in oil prices. The poundwasdown0.05%at$1.3533, after jumping 1.13% the day before to $1.3556, its highest level since May12.Formarkets, a move away from Miliband as chancellor is likely to be seen as modestly supportive given his preference for greater fiscal expansion,” Matthew Ryan, head of market strategy at global financial services firm Ebury, said. Andy Burnham is expected to be formally sworn in as prime minister on July 20. Britain will need extra tax rises or spending cuts to prevent government debt spiralling higher from current levels, the Office for Budget Responsibility said last week. Stronger trend productivity growth would enable the economy to grow somewhat faster before inflation begins to take off and makes it easier to generate sufficient tax revenue to fund public spending,” Andrew Wishart, UKeconomist at Berenberg, said. We don’t think that the policies new Prime Minister Andy Burnham has proposed so far will make much of a difference to the UK’s long-term growth prospects, but he might get lucky,” he added. Wishart argued that the UK economy is not out of the woods, but a combination of resilient growth and flatlining employment implies that the pickup in productivity growth seen in 2025 has continued into 2026. The euro rose 0.13% to 84.79 pence after falling 0.72% on Wednesday to 84.55 pence, the lowest level since June 10.  

DOLLAR FALLS AFTER COOLING PRODUCER PRICES, MIDDLE EAST ESCALATION IN FOCUS 

The dollar fell against major currencies on Wednesday after softer-than-expected U.S. producer prices reinforced signs of easing inflation, bolstering the view that the Federal Reserve can remain patient on interest rates even as investors weighed renewed strikes on Iran. The Producer Price Index for final demand dropped 0.3% in June after a downwardly revised 0.6% increase in May, the Bureau of Labor Statistics said on Wednesday. Economists polled by Reuters had forecast the PPI unchanged after a previously reported 1.1% advance in May. The dollar slipped 0.2% against the yen to 161.90 yen. The euro rose 0.51% to $1.1479, it’s highest since June 19. Sterling advanced 1.25% to $1.3554, it’s highest since mid-May, supported by news that Andy Burnham, likely to be named Labour party leader on Friday, will appoint a fiscally conservative finance minister. The U.S. dollar index, which tracks the currency against six major peers, fell 0.55% to 100.36, it’s lowest since mid-June. It fell 0.4% in the previous session, its biggest decline in nearly two weeks, after touching its highest level since July 2. The dollar’s recent strength has largely been tied to expectations of tighter U.S. monetary policy,” said Steve Kolano, chief investment officer at Integrated Partners. “Not necessarily tighter policy itself, but rather a lower probability of policy easing, as Fed funds futures are still pointing to the possibility of one to two rate hikes by the end of the year.” New York Fed President John Williams said inflation remains “unquestionably too high ” but may have peaked and should begin easing, adding that monetary policy is well positioned to guide it back to target. “This PPI report adds to the evidence that inflation momentum is cooling. Yesterday’s CPI likely exaggerates the slowdown, but broader data suggest inflation may be past its peak,” said Jeremy Schwartz, senior US economist at Nomura. “The Fed will likely remain alert to inflation risks, but recent data support our expectation that policy will remain on hold.” EYES ONTHEMIDDLEEAST The latest escalation in hostilities between the U.S. and Iran kept oil prices near one-month highs, maintaining pressure on the inflation outlook. The U.S. military said it had begun a new wave of strikes on Iran at 6 a.m. ET (1000GMT) on Wednesday, after U.S. President Donald Trump said on Tuesday that Washington had reimposed a naval blockade of all Iranian ports. The dollar has tended to benefit during flare-ups in the conflict because of its safe-haven status and the relatively limited impact of higher energy prices on the U.S. economy compared with some peers. Cooler U.S. inflation had earlier weighed on the dollar. U.S. consumer inflation slowed more than expected to 3.5% on a year-on-year basis in June, data showed on Tuesday. The headline consumer price index fell 0.4% month-on-month, its first decline since April 2020, as energy prices retreated. “The shift has taken the air out of the recent USD rally, but the technicals haven’t necessarily turned over just yet,” said Michael Boutros, senior market analyst at StoneX in New York. “The recent escalation in the Iranian conflict has caused a resurgence in oil and continued elevated energy prices could dampen the material progress made on the inflation front.” NewFedChair Kevin Warsh told the House Financial Services Committee on Tuesday that the central bank has “no tolerance” for persistently elevated inflation and pledged to “do my job” if challenged by Trump. Traders are now pricing in about a 70% chance of a December rate hike, down from around 80% yesterday, while a move later this month is seen as highly unlikely, according to LSEG data. Elsewhere, China’s economic growth slowed sharply to 4.3% in the second quarter, its weakest pace in more than three years. The yuan briefly firmed to a one-month high as the data reinforced expectations of further policy support. “I see limited follow-through to the dollar’s post-CPI decline,” said Elias Haddad, global head of markets strategy at Brown Brothers Harriman in London, adding that U.S. economic outperformance, the Fed’s commitment to fight inflation and strong foreign demand for U.S. assets should keep the greenback supported.