Monthly Foreign Exchange Review
Our latest Foreign Exchange Outlook explores how declining energy prices, resilient U.S. economic data, shifting rate policies and ongoing geopolitical risks are shaping currency markets. While the dollar remains firm for now, the outlook into July and beyond could change quickly if lower oil prices begin flowing toward inflation.
Oil and the Strait of Hormuz remain a driver of FX and market volatility. A broken ceasefire choked Strait of Hormuz oil flows again and sent Brent crude surging past $90 a barrel at its peak from the $68 lows in early July, before settling back around $85. The conflict ripped gasoline, diesel and jet fuel prices sharply higher. Important: Refinery prices of turning oil into gas and diesel hit a record high over $70 a barrel, and this means a huge mismatch between oil prices and gasoline prices. We are still concerned there is a risk of much higher oil, diesel and gasoline prices if China returns to the oil market in full.
U.S. inflation moderated in June, offering some relief, but remains solidly above the 2% fed target. Headline CPI fell 0.4% month-over-month—the first monthly decline since 2020—bringing the year-over-year rate to 3.5%. Core PCE (the Fed’s preferred measure) rose just 0.1% month-over-month and held at 3.3% year-over-year. Still, a shocking late month 6.2% GDP price index number show inflation has not been tamed yet.
The labor market data indicates the economy is slack but not stalled, with weak jobs growth in June. June nonfarm payrolls came in at just 57,000 accompanied by downward revisions to prior months. Still, weekly jobless claims told a different story: claims fell to a 57-year low of 187,000 in the week ended July 18. The labor market remains stable, if weak.
U.S. economic growth slowed to an annualized 1.5% in Q2. This was below the 2.0% consensus and down from 2.1% in Q1. Legitimate good news: Consumer spending was a standout, rising 3.2%, the strongest pace since Q3 2025. June retail sales ex-gas sales rose a healthy 0.7%. The economy is moderately growing so far in 2026 but is not strong.
The U.S. dollar had a volatile July. The USD spent most of July grinding moderately stronger vs. nearly all currencies, before a minor reversal the last days of the month. USDJPY hit a 40-year low of 163.94 before surging 3% to 157.98 on suspected intervention. Country-specific exposure to energy and inflation will be a key driver of cross-currency divergence and vs. the USD throughout the month of August.
Long-term interest rates are at multi-decade highs, reflecting macro risks and inflation concerns. The Fed held rates unchanged at 3.50%–3.75% on July 29 in a 9-3 vote with 3 voting to raise rates to combat inflation. The 30-year Treasury yield surged to 5.23%, a 19-year high after the decision. Mortgage rates crept back up to 6.6%, the highest in a year. The USA has interest rate risk.
August Outlook: Watch for moderate USD strength, and above-average USD volatility for August. Positive USD sentiment took a hit in the last days of July due to low U.S. growth and U.S. inflation not falling as expected. Still, the USD is the safe-haven currency, and there is a “shaky vibe” due to uncertainty everywhere we look. Energy and Iran could come to a head in August or early September, many countries had weak economic growth so far in 2026, and inflation won’t go away. It’s not “exactly” stagflation, yet. Volatility remains moderately elevated in August.
EUR/USD
Source: Bloomberg Finance LP
The EUR remains near 12-month lows despite a surprise late July rally for the EUR. Underlying fundamentals favor a stronger USD vs. the EUR moving into August; tariffs, better economic growth, higher interest rates. A surprise 0.4% eurozone Q2 GDP print yanked the region out of negative territory and sparked temporary short-covering in the EUR. Still, expect the USD to reassume control, capping the euro upside in August.
USD/CAD
Source: Bloomberg Finance LP
USDCAD stalled above 1.42 in July after the June rally. A positive domestic data turnaround completely flipped the Q1 recession script. These strong numbers and and stronger energy prices are all CAD-positive. Heading into August, erratic crude price action will clash with strongish domestic indicators.
USD/MXN
Source: Bloomberg Finance LP
The peso remains one of the stronger EM currency stories despite recent volatility. USDMXN’s inability to crack the 17.10 floor suggests MXN is at its proper level, and levels above 17.50 look increasingly attractive. Mexico has avoided recession and continues to benefit from resilient exports. Still, sticky services inflation (i.e., wage growth) remains a key risk heading into the August Banxico meeting.
USD/CNY
Source: Bloomberg Finance LP
USDCNY plunged past 6.75 in late July, marching stronger vs the USD. Is this stronger CNY a peace offering from China on trade? It seems like it, because China’s economy shows tepid domestic manufacturing data which usually means “weaker yuan.” The weak macro prints prompted an immediate, urgent pledge from the Politburo to accelerate aggressive fiscal support. Still, trade with USA and EU is at record levels, so this CNY needs to be stronger to balance trade. A stronger yuan bias dominates in August.
GBP/USD
Source: Bloomberg Finance LP
GBPUSD bucked other currencies and remained strong vs the USD, gaining over 1.3%, The Bank of England's aggressive 6–3 hold at 3.75% shocked the market, and should boost a resilient UK labor market. UK inflation is only 2.2%, which is low for the G10, and is more support for the pound sterling. Expect a strictly range-bound environment, with a mild structural lean favoring sterling on dips for August.
USD/JPY
Source: Bloomberg Finance LP
USDJPY hit multi-decade highs at 163.99 before Ministry of Finance’s intervention caused a violent 3% intraday collapse. Still this JPY wants to be weaker due to Japan continuing to spend and their inflation vs. their rates. Deep structural headwinds from massive retail investment outflows will fight to keep the yen weak despite interventions. A widening yield gap also favors the USD. Moving into August, the bias tilts back toward a weaker JPY in August, but the threat of interventions will put a hard lid above 162.00.
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