Forex market roundup: dollar extends falls as Fed hike bets fade

Dollar weakness extends into a second session as Fed hike expectations cool, lifting gold back toward $4,400 and the pound to a three-month high, while Canada's dollar leads the field ahead of CPI data.

Dollar falls as Fed hike bets fade

• The dollar index extended its decline for a second straight session — a third against the Canadian dollar — as market expectations for a Federal Reserve rate hike faded. Fed funds futures now imply a two-thirds chance the Fed holds rates next month, according to InvestingLive. The slide gives back the ground the index won last week, when it posted its first weekly gain in three.
• That weakness has provided tailwinds across the majors: the euro strengthened above 1.1550, trading around 1.1575, and the pound climbed above the mid-1.3500s, near a three-month high — a sharp turn for a currency that ranked as the weakest major on Friday.
• Gold gained momentum to around $4,395, back at the $4,400 ceiling it cleared on Thursday and lost on Friday, as cooling US inflation data dampened Fed hike expectations despite ongoing US-Iran tensions.
• The FOMC minutes take center stage this week, according to FXStreet, after July retail sales contracted 0.6% month-on-month against a 0.1% forecast — the miss that set this repricing in motion.

Oil holds its bid as Hormuz talks stall

• WTI crude posted modest gains above $81.50, trading around $81.60, as talks to reopen the Strait of Hormuz have completely deadlocked — a reversal of the diplomatic efforts traders were monitoring on Friday.
• The geopolitical risk premium is being fed from a second direction: Israel has resumed airstrikes against Lebanon after scaling them back earlier this month, and the US is preparing fresh sanctions on Iran, Reuters reported.

Asia and Oceania in focus

• Japan's economy grew more slowly than expected, with Q2 GDP expanding 0.3% quarter-on-quarter against a 0.5% forecast, and 1.1% annualised against 2.0% expected. The miss complicates the Bank of Japan's rate hike timeline — and yet the yen still gained, with USD/JPY lower for a second session around 159.10. Direction is coming from the repricing of US policy, not from domestic Japanese data.
• The Australian dollar rose for a second session to around 0.7090, supported by a hawkish Reserve Bank of Australia stance — a policy gap that widens against a Fed the market now expects to hold.
• In New Zealand, July retail card spending rose 1.3% month-on-month, reversing a 1.4% fall, while the services PMI eased to 50.6 from 50.9. NZD/USD climbed above 0.5900 to its highest since June 3 — but that is the dollar falling rather than the kiwi leading: on an intraday basis our strength gauge ranks the New Zealand dollar as the weakest major.

Market metrics and upcoming data

• Market sentiment, as measured by our FSI, registers 67 (Greed), while the MRS climbs to 66 from 59 in each of the last three sessions — its highest reading in over a week — and the CTS stays high at 80.
• The Canadian dollar is the strongest major today, lifted by the softer dollar and by firmer crude — the petrocurrency link — with USD/CAD around 1.3870 ahead of key inflation data.

Key events today

• CAD · CPI m/m · forecast 0.4% vs previous -0.4%
• CAD · Median CPI y/y · forecast 2.0% vs previous 1.9%
• CAD · Trimmed CPI y/y · forecast 1.8% vs previous 1.8%