Forex Market Update – 20 July 2026

At 15:55 ET (19:55 GMT) the U.S. dollar index was up 0.2 percent, trading at 100.94, as safe‑haven demand intensified following President Donald Trump’s public promise to make Iran “pay” for the killing of three U.S. service members. The escalation in the Middle East, combined with a dearth of U.S. economic releases and the Federal Reserve’s communications blackout, underpinned the greenback’s strength.

The previous week’s dollar decline had been driven by positive U.S. inflation data that reduced near‑term rate‑hike expectations. However, June’s headline consumer price index and producer price index showed moderation, gasoline‑station retail sales fell month‑on‑month, and the University of Michigan survey reported July consumer sentiment at its highest level since February with a drop in year‑ahead inflation expectations. These data points gave the Fed some breathing room; the CME FedWatch tool indicated that the probability of a 25‑basis‑point rate hike at the end of July fell to roughly 16 percent from about 42 percent earlier in the month.

Oil prices, which had slid after the United States and Iran signed an interim peace deal, spiked again as tensions renewed, reviving inflationary concerns. Several Fed officials, including former Fed chair Kevin Warsh speaking to Congress and Dallas Fed President Lorie Logan, warned that the fight against inflation remains far from over, with Logan calling for “modestly higher” rates.

In Europe, market participants awaited the European Central Bank’s policy decision on Thursday. The ECB, which in June became the first G7 central bank to raise borrowing costs to counter the Middle‑East‑driven inflation shock, was expected to keep rates unchanged but adopt a hawkish, data‑dependent stance for the autumn. Thierry Wizman, global FX and rates strategist at Macquarie, noted that the overnight index swap market assigned a 5 percent probability to an ECB hike, though a 33 percent probability of a hike was more defensible. A 25‑basis‑point increase to a 2.50 percent deposit rate would still sit within the neutral range.

The euro slipped 0.2 percent, trading at $1.1414.

In the United Kingdom, sterling fell 0.2 percent to $1.3434 after Andy Burnham was sworn in as the country’s seventh prime minister in a decade, succeeding Keir Starmer. In his first speech outside Downing Street, Burnham pledged not to take risks with the economy and to adhere to the fiscal rules set by the previous government, promising cost‑of‑living relief while maintaining fiscal discipline. When questioned about borrowing for investment, he reiterated his commitment to existing fiscal rules and to using any flexibility within them. Burnham appointed former defence secretary John Healey as chancellor, replacing Rachel Reeves.

British gilt yields surged as investors dumped bonds, and the UK stock market closed lower. Deutsche Bank chief UK economist Sanjay Raja warned that Burnham’s inaugural budget would be a demanding event, with limited fiscal headroom due to higher rates, a softer macro outlook, and renewed geopolitical risks. Energy prices, although eased from their peaks, remain a key risk, and the overall fiscal outlook has become more challenging since spring, implying difficult trade‑offs in the upcoming Autumn Budget.

U.S. Central Command confirmed that three U.S. service members were killed by Iranian attacks, prompting Trump to post on Truth Social that “Every time Iran kills an American Soldier they will pay for that killing many times over!” The directive was said to have been passed to Secretary of War Pete Hegseth and Chairman of the Joint Chiefs of Staff Daniel Caine.

Key Data Points

  • U.S. dollar index: 100.94 (+0.2 %) at 15:55 ET.
  • Sterling: $1.3434 (‑0.2 %).
  • Euro: $1.1414 (‑0.2 %).
  • Fed July‑end rate‑hike odds: ~16 % (down from ~42 %).
  • ECB rate decision expected Thursday; 5 % probability of hike, 33 % probability of a 25 bp increase to 2.50 %.
  • British gilt yields rose sharply; UK equity index closed lower.
  • Fiscal rule adherence pledged by new UK PM Andy Burnham; John Healey named chancellor.