In comparison to the U.S. dollar, the euro has a stronger monetary policy backdrop. According to a Reuters survey, 57 of 69 economists expected the ECB to raise its deposit rate of 2.50 percent in September, while inflation continues to be above the ECB’s target of 2 percent. Policy divergence in favor of the euro continues to increase as the expectations surrounding the Fed’s policy continue to decline.

Sterling is also benefiting from policy divergence. UK growth for the second quarter was at 0.4 percent, and the Bank of England’s Chief Economist, Huw Pill, indicated that the recent growth that was also in excess of expectations, is a good reason for policy to be tightened. Currently markets are calling for at least one additional hike by the BoE in 2026. New data on the labor market and inflation in the U.K. will be released this week that will be useful in evaluating this position.

The main issue for all three currencies is the Middle East. Renewed U.S.-Iran tensions and ongoing disruptions through the Strait of Hormuz pose risks for another energy-related inflation shock, which could once again bring expectations of tighter policy if price pressures begin to accelerate.

U.S. Dollar Index Technical Analysis: DXY Defends $99.38 Support but Remains Below Key EMAs