US FX WRAP: Dollar boosted by geopolitical risk; gold strength helps AUD
USD was firmer on geopolitical risk increasing yet again. Recent moves in yields show markets are returning to the view that oil prices will remain higher for some time with the US 2yr approaching its YTD high, and money markets back to pricing over 30bps of tightening by year-end from the Fed. Taken together, geopolitical developments today were net negative. Reports showed Yemeni Houthis have warned shipping firms to avoid loading or discharging at Saudi ports, which was later accompanied by reports that six Saudi ships were reportedly forced to return from Bab al-Mandab. Meanwhile, talks between Iran and Pakistan have seemingly yielded little progress. Data and Fedspeak were absent today with focus this week to be split on geopolitical and US earnings (GOOGL, TSLA, INTC).
AUD outperformed vs USD, helped by higher gold prices, meanwhile, NZD failed to hold onto strength despite a slightly hotter-than-expected Q2 inflation figure, 1.5% Q/Q (exp. 1.4%).
CHF and JPY were the less preferred havens, with even gold climbing despite the suspected higher rate environment. USD/JPY made new YTD highs of 163.235 while USD/CHF hit highs of 0.81326.
Sterling weakness continued in the aftermath of UK PM Burnham announcing John Healey as the new Chancellor. Additionally, funding concerns have already arisen. The new government announced they would remove VAT on electricity bills, an unfunded measure given the government is yet to find the savings to fund the now-cancelled Digital ID rollout which is now being planned as the source of funds for the VAT removal on electricity bills.
Sessions where the dollar firms on geopolitical risk while the traditional havens lag follow a familiar template: when the risk originates in energy supply routes, as with Red Sea shipping disruptions, the shock is inflationary rather than deflationary, so the transmission runs through front-end yields and rate repricing rather than the classic flight into CHF and JPY. The two-year approaching its highs while money markets re-add tightening is the signature of that oil-led variant, and it explains why gold can rally alongside rising real yields, a combination that appears in episodes where geopolitical hedging demand overrides the rate channel. The AUD bid on gold strength fits the established pattern of commodity currencies tracking their export complex even against a firmer dollar, while the NZD failure to hold a hot inflation print is typical of sessions where global drivers swamp domestic data. The sterling leg is a fiscal credibility story: a new Chancellor arriving alongside an unfunded spending pledge and contested funding sources is the kind of sequence that has historically pressured gilts and the currency until a credible funding plan appears, and funding-cost behavior in the gilt market is the tell. Near-term follow-ons are whether shipping disruption broadens or fades, since prior Red Sea episodes have seen the risk premium ebb quickly absent escalation, and whether this week's heavy US earnings slate reasserts itself as the dominant driver once the geopolitical tape quiets.