The euro edged higher in European trading on Tuesday against a basket of global currencies, extending its gains for a fourth consecutive session versus the US dollar and moving closer to a two-week high. The single currency continues to benefit from a string of weaker-than-expected US economic data, which has reduced expectations for additional Federal Reserve rate hikes this year.

At the same time, expectations for higher European interest rates have eased significantly following less hawkish comments from European Central Bank President Christine Lagarde and softer-than-expected eurozone inflation data for June.

The Price

• EUR/USD today: The euro rose by less than 0.1% to $1.1448 from an opening level of $1.1441, after touching an intraday low of $1.1436.

• The euro closed Monday up by less than 0.1% against the dollar, marking its third straight daily gain and remaining close to a two-week high of $1.1473.

The US dollar

The US Dollar Index fell around 0.1% on Tuesday, extending losses for a second consecutive session and moving closer to its lowest levels in two weeks, reflecting broader weakness in the greenback against major and minor currencies.

The decline comes as a series of US economic reports continue to disappoint expectations. The latest data from the Institute for Supply Management showed a sharper-than-expected slowdown in US services sector activity during June.

Those figures have reduced the likelihood of the Federal Reserve delivering another rate hike this year. Investors will now focus on Wednesday’s release of the minutes from the first Fed policy meeting chaired by Kevin Warsh for further clues on the outlook for US monetary policy.

European interest rates

• ECB President Christine Lagarde said last week during the Sintra conference in Portugal that risks to inflation and economic growth in the eurozone have become more balanced compared with a few weeks ago, helped by the recent decline in oil prices.

• Official eurozone inflation data showed a larger-than-expected slowdown in consumer price growth during June, largely due to lower fuel prices following the end of the Iran conflict.

• Following those comments and inflation figures, money markets cut expectations for a 25-basis-point ECB rate hike in July from 30% to just 5%.

• Investors are now awaiting further eurozone data on inflation, unemployment and wage growth to reassess the outlook for ECB policy.

The Japanese yen rose in Asian trading on Tuesday against a basket of major and minor currencies, putting it on track for its first gain in three sessions against the US dollar. The move helped the currency pull further away from its lowest levels in 40 years, renewing speculation about whether Japanese authorities could step in to support the local currency.

With inflationary pressures easing on policymakers at the Bank of Japan, expectations for an interest rate hike at the central bank’s July meeting have declined, as investors await additional economic data from the world’s fourth-largest economy.

The Price

• USD/JPY today: The dollar fell around 0.25% against the yen to ¥161.69, compared with an opening level of ¥162.07, after touching an intraday high of ¥162.18.

• The yen ended Monday down 0.45% against the dollar, marking its second consecutive daily loss.

• The Japanese currency hit a 40-year low of ¥162.84 per dollar last Wednesday before entering a short-term recovery phase that fueled speculation about possible intervention in the foreign exchange market.

Japanese authorities

The yen has once again come under the spotlight after approaching its weakest levels since 1986 against the US dollar, increasing expectations that Japanese authorities may intervene to prevent excessive weakness in the currency.

Views and analysis

• Analysts at OCBC believe the risk of intervention is more likely to trigger bouts of volatility and temporary corrections rather than create a lasting reversal in the USD/JPY trend.

• They added that without a meaningful shift in economic fundamentals, verbal warnings or even direct intervention alone are unlikely to alter the broader direction of the currency pair.

• Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, said the market remains aware of the risk of intervention by Japanese authorities.

• Chandler added that options market activity still shows signs of major investors buying short-term dollar put options as a hedge to protect long-dollar positions in the event of official intervention.

• Lee Hardman, Senior Currency Analyst at MUFG, said there had been speculation late last week that Japan might intervene to support the yen during the US holiday period when trading conditions were less liquid. However, no action was taken, which contributed to the yen giving back part of its recent gains.

Japanese interest rates

• Market pricing currently implies less than a 25% probability that the Bank of Japan will raise interest rates by 25 basis points at its July meeting.

• Investors are awaiting further data on inflation, unemployment and wage growth in Japan to reassess those expectations.

Oil prices were little changed on Monday, trading near levels seen before the outbreak of the war with Iran, after Saudi Arabia cut its official crude selling prices and OPEC+ approved another production target increase starting in August, while oil exports through the Strait of Hormuz continued to recover.

Brent crude futures, which surged above $126 per barrel in late April to their highest level in four years, fell 27 cents to $71.85 per barrel by 1:35 p.m. ET.

US West Texas Intermediate crude also declined 27 cents to $68.42 per barrel. There was no settlement for US crude futures on Friday due to a public holiday in the United States.

Both benchmarks were little changed last week after retreating throughout most of the previous month to levels last seen in late February, before the conflict significantly disrupted global energy flows.

Giovanni Staunovo, an analyst at UBS, said downside pressure continues to stem from the release of oil tankers that had previously been stranded in the Gulf, increasing seaborne oil supply.

Investors continue to monitor discussions between the United States and Iran regarding the future of shipping through the Strait of Hormuz, while also tracking the pace of recovery in Gulf oil exports.

Meanwhile, two sources familiar with the matter said the United Arab Emirates raised oil production in June to near-record levels, exceeding 3.8 million barrels per day after leaving OPEC to free itself from production constraints.

Saudi price cuts and OPEC+ output increase raise price war concerns

Saudi Arabia set the official selling price of its Arab Light crude for Asia in August at $1.50 below the Oman/Dubai benchmark average, marking the largest monthly price cut since Reuters began tracking the data in 2003.

Traders also reported that Abu Dhabi National Oil Company (ADNOC) is offering crude cargoes through tenders at discounted prices.

Robert Yawger, Director of Energy Futures at Mizuho, said there are growing signs that Gulf producers may be preparing for a price war.

On Sunday, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, led by Russia, agreed to increase production targets by 188,000 barrels per day starting in August, following similar increases in June and July.

However, these production increases largely remained theoretical because the war with Iran led to the closure of the Strait of Hormuz to private oil tanker traffic serving major OPEC producers, including Saudi Arabia, Kuwait, and Iraq, limiting their ability to raise actual output.

Tamas Varga, an analyst at PVM, said producers are selling into a declining market, reducing the chances of a near-term price recovery. He added, however, that lower oil prices will ultimately support global demand.

In other developments, the Ukrainian military announced overnight strikes targeting Russia’s largest oil refinery in Omsk, as well as facilities in the Yaroslavl and Leningrad regions.

In the shipping sector, Maersk and Hapag-Lloyd announced plans to resume some voyages through the Suez Canal, which handles roughly 10% of global trade.

Most shipping operators had abandoned the Asia-Europe route after Houthi attacks on vessels in the Red Sea during the Gaza war.

A Hapag-Lloyd spokesperson said returning to the route would shorten voyage times by approximately four weeks compared with alternative shipping routes.

The intense heatwave that swept across Europe last week highlighted the growing challenges facing the continent’s transition to clean energy. The extreme weather coincided with London Climate Action Week and even forced the cancellation of some scheduled events, reinforcing warnings about the urgency of addressing climate change.

One of the key conclusions emerging from the conference, further underscored by the severe weather conditions, was that Europe has missed important opportunities to accelerate its shift toward clean energy and reduce greenhouse gas emissions.

According to a side report published by news platform Semafor, several bankers attending the event agreed that European Union authorities risk slowing energy transition investments by failing to complete the integration of Europe’s capital markets, while shortcomings in regulatory frameworks continue to create additional obstacles.

Officials from Barclays argued that European and British regulations impose excessive restrictions on preferred energy storage technologies and called for governments to play a larger role in coordinating efforts between entrepreneurs and investors to accelerate funding.

European energy markets have faced unprecedented pressure in recent years due to a series of global crises. According to the report, policymakers have failed to implement sufficient measures to prevent similar disruptions from recurring.

Earlier this year, the BBC warned that Europe had “sleepwalked into a new energy crisis” after the closure of the Strait of Hormuz disrupted markets that were still recovering from the effects of the Russia-Ukraine war, related sanctions, and global supply chain bottlenecks.

Renewable energy becomes an economic and security necessity

As geopolitical disruptions continue to affect fossil fuel supplies, experts increasingly believe that diversifying energy sources and strengthening self-sufficiency have become essential pillars of energy security both in Europe and globally.

Wind and solar power are no longer viewed solely as tools for combating climate change. They are increasingly seen as critical components of energy independence and resilience.

David Frykman, General Partner at Swedish venture capital firm Norrsken, previously wrote in Fortune magazine that wind and solar energy cannot be embargoed, blockaded, or weaponized by foreign powers. He added that every terawatt-hour of renewable energy produced domestically is energy that cannot be used by adversaries as a source of geopolitical pressure.

Despite the steps Europe has taken since the outbreak of the Russia-Ukraine war to expand renewable energy capacity, the subsequent energy shock caused by the conflict involving the United States, Israel, and Iran exposed the limitations of those efforts. According to the report, Europe still faces a significant energy gap while simultaneously confronting increasingly dangerous heatwaves.

In a recent report, Allianz warned that extreme heat has become a structural economic risk and identified Europe as one of the regions most vulnerable to its impact.

The company estimates that Europe’s largest economies could lose more than $600 billion by 2030 due to costs and damages associated with rising temperatures. France is expected to face the largest losses at roughly $240 billion, followed by Italy at $147 billion, Germany at $131 billion, and Spain at approximately $120 billion.

The report quoted a European diplomat as saying that European leaders, instead of focusing on the long-term plans needed to strengthen the continent’s competitiveness in an increasingly volatile world, have become preoccupied with rising energy costs and voter concerns. As a result, they are pursuing short-term solutions similar to those adopted after Russia’s full-scale invasion of Ukraine.

The diplomat noted that while the current conflict differs from previous crises, Europe’s divisions and energy-related challenges remain largely unchanged, warning that repeating the same policy responses is no longer sustainable.

Several bankers participating in London Climate Action Week argued that one of the most important solutions is reducing fragmentation across European financial markets. They said that the large number of regulatory systems and bureaucratic hurdles across the European Union weakens the ability of capital markets to finance the energy transition efficiently.

They also noted that this environment limits the ability of European startups to compete for investment funding against their counterparts in the United States, ultimately slowing innovation and investment in clean energy technologies across the continent.