The U.S. dollar traded with a softer tone against the euro and yen on Monday as Iran truce hopes lifted risk appetite ahead of a busy week of central bank meetings. According to Reuters, the euro rose as much as 0.4% before paring gains to trade about flat on the day at $1.1371, while the U.S. dollar slipped 0.1% to 163.74 yen. The dollar index dipped 0.1% to 101.34, with the currency off its day's lows as the retreat in U.S. yields was more modest compared to drops in other markets. As reported by Reuters, "While USD is down on the day, it has been shifting higher in the day as U.S. rates have rallied by less than those in the rest of the world," said Benjamin Ford, researcher at Macro Hive. "Overall, that leaves you in a state where the market needs to put front-end rates pricing up against risk premium," Ford added. The US Dollar Index opened and closed lower, falling as much as 0.23% to 101.22 following the latest developments.
Oil prices sank significantly as Brent crude futures fell $7.78, or 8%, to $89 a barrel after the U.S. military temporarily halted its two-week-long strikes in Iran. As reported by Reuters, Tehran said it would also halt attacks if the U.S. maintained the pause, raising hopes for renewed diplomatic efforts to de-escalate the conflict. According to XM Group, WTI spot prices are hovering at around $85, while the December 2026 WTI oil futures contract has dropped to $76, around 8% below last week's peak. The latest developments show U.S. crude plunged over 6% to $83.10 per barrel, with Brent oil briefly surging above $100 before settling lower. Developments on the geopolitical front also triggered a sharp decline in oil prices, helping to alleviate inflation concerns. Restricted shipping activity through the Strait of Hormuz and the Bab el-Mandeb Strait helped cushion the downside for crude prices, acting as a partial offset to the broader sell-off in energy markets. The Strait of Hormuz remains in de facto closure with ship tracking data recording only roughly 1-3 vessels transiting through the strait in recent days, essentially signaling a complete standstill. LNG tankers have not been able to transit whatsoever since 16 July, while just 11 commodity vessels only crossed the Bab el-Mandeb strait on 26 July, compared to the usual daily traffic of 60 to 80 vessels.
The dollar weakness comes ahead of the Federal Reserve's July 28-29 policy meeting, with traders seeing a roughly 33% chance of a quarter-point Fed rate hike, down from 37% at the end of last week but double the probability seen a week ago, according to CME Group's FedWatch tool. However, the probability that the Fed will hold rates steady in July is 63.7%, while the probability of a cumulative 25-basis-point hike is 36.3%. According to Reuters, "The FOMC statement might acknowledge the upside risks to inflation posed by renewed geopolitical conflict, and Warsh might as well in his press conference," said Goldman Sachs Chief U.S. Economist David Mericle. Despite the softer USD tone, bearish Dollar traders appeared reluctant to establish significantly larger positions ahead of the upcoming two-day Federal Open Market Committee (FOMC) meeting on Wednesday. Market participants are expected to scrutinize the outcome for guidance on the Fed's future policy path, with the combination of central bank signals and geopolitical headlines likely to remain a key driver for both the USD and the GBP/USD pair. Investors will also look to U.S. second-quarter GDP data and the Fed's preferred inflation gauge, core PCE inflation, this week for more clues on the health of the world's biggest economy. Fed funds futures are still leaning into no change for tomorrow's Fed meeting, estimating a roughly 66% probability that the central bank will leave its current 3.50%–3.75% target interest-rate range steady in Wednesday's announcement. However, a rate hike at the September FOMC meeting is currently priced at an 80%-plus probability, according to Investing.com.
Bitcoin was about flat on the day at $64,812 following the latest developments, showing resilience despite the broader market volatility. This decline in oil prices supported risk assets, including cryptocurrencies, with Bitcoin rebounding under the dual influence of falling oil prices and a temporary easing of geopolitical tensions. According to technical analysis, if Bitcoin reclaims the 20-3 day EMA near $65,600, it could target the $69,000–$70,500 resistance zone, with a potential breakout pushing prices as high as $95,000 to $123,000. However, a drop below $54,000 would invalidate this bullish setup and risk a deeper correction. Bullish bets on the dollar against other major currencies climbed to their highest level since 2015, with speculators' net long positions surging to $45.37 billion in the week ended July 20, according to Commodity Futures Trading Commission data. The Bank of England and Bank of Japan are widely expected to keep interest rates unchanged at their meetings on Thursday and Friday respectively, while maintaining a cautious stance on inflation. The Norwegian crown dropped 0.6% to 9.642 per dollar, despite being one of this month's strongest major currencies, buoyed by a rebound in oil prices that has improved the outlook for the energy-exporting economy.
The pound pared early gains to trade about 0.1% lower at $1.3308 ahead of Thursday's BoE meeting, with the central bank facing renewed inflation risks from higher oil prices, just days after new Prime Minister Andy Burnham and finance minister John Healey took office. According to Reuters, "The MoF's intervention window looks increasingly like it has passed," said Benjamin Ford, who sees the risk of intervention beginning to climb once it has become clearer that oil is also shifting lower. The complication for the Fed is that absent the war, monetary policy is arguably at or close to a neutral stance that's appropriate for current conditions, based on a simple model that uses the unemployment rate and the annual pace of consumer inflation. However, we live in a world that can't ignore the Middle East conflict, even though how the Fed should deal with it is unsettled at this stage. The main challenge is that both scenarios are plausible, which implies that standing pat is still reasonable. Inflation continues to run well above the Fed's 2% inflation target, based on headline and core measures of the Personal Consumption Expenditures (PCE) price index, which has long been cited as the central bank's preferred measure. U.S. stock index futures rose across the board, with S&P 500 futures up 0.65% and Nasdaq futures up 1.2%. The decline in oil prices not only cooled inflationary worries but also eased pressure on the Federal Reserve to raise interest rates, with the US Dollar Index opening and closing lower, falling as much as 0.23% to 101.22.
