Forex Outlook: Dollar Drops as Geopolitical Risks Recede

The US dollar is under pressure against its key rivals — the euro, pound, and yen — as markets react to signs of de-escalation in the Middle East and dovish signals from Federal Reserve officials. Today, President Donald Trump announced a ceasefire in the Israel-Iran conflict, confirmed by both sides, which markets viewed as a clear positive. The fading risk of an Ormuz Strait blockade — a scenario that could have sent energy prices sharply higher — is diminishing demand for the dollar as a safe haven.

Additional headwinds for the greenback stem from a shift in Fed rhetoric toward a more accommodative stance. In recent comments, Fed Vice Chair for Supervision Michelle Bowman and Chicago Fed President Austan Goolsbee floated the possibility of rate cuts in the near term, citing sustained declines in inflation and less concern about economic headwinds from rising trade tariffs. However, Fed Chair Jerome Powell, addressing Congress today, reiterated a cautious approach, emphasizing that the central bank will not act until it gains clearer insight into the impact of tariffs on consumer prices — a position that diverges from the White House, which is pushing for immediate rate reductions. These evolving positions are already reflected in short-term forex forecasts, where the dollar is losing ground to its main peers.

Eurozone

The euro is gaining against the US dollar but underperforming versus the pound and yen. June's German business climate data (IFO) showed improvement, with the headline index rising from 87.5 to 88.4 (consensus: 88.1), expectations climbing from 89.0 to 90.7 (forecast: 90.0), and current conditions ticking up marginally to 86.2, slightly missing estimates. Analysts highlight that expectations of higher government spending and the anticipated benefits of a more accommodative European Central Bank are improving investor sentiment across the euro area.

United Kingdom

The British pound is strengthening against both the euro and the dollar but is slipping against the yen. June data from the Confederation of British Industry (CBI) showed a further decline in industrial orders, with the index falling from -30.0 to -33.0 (expected: -28.0), marking the weakest reading since January. The UK manufacturing sector continues to struggle amid elevated energy and labor costs, skill shortages, and persistent global economic uncertainty. Bank of England board member Megan Greene recently cautioned that the recent uptick in UK inflation may prove more persistent than expected, advising a measured approach to further rate cuts. Most analysts anticipate the next round of monetary easing in August, with another potential cut by year-end.

Japan

The Japanese yen is outperforming its major peers — euro, pound, and dollar — buoyed by the easing of Middle Eastern tensions and reduced risk of an Iranian blockade of the Ormuz Strait, a crucial oil supply route for Asia. This reduced risk profile is likely to ease pressure on the Japanese economy, giving the Bank of Japan more leeway to maintain its tightening stance in the near term. Markets await Wednesday's Bank of Japan Summary of Opinions, which is expected to provide clues about the outlook for further rate hikes. Most economists continue to expect at least one more rate increase this year, assuming inflation trends higher and US tariffs do not adversely impact Japanese manufacturing.

Australia

The Australian dollar is firmer against the euro and US dollar, while showing mixed moves versus the yen and pound. In the absence of major domestic data releases, AUD price action is driven mostly by external factors. Looking ahead, Wednesday will bring May’s inflation figures — with consensus expecting annualized CPI to slow slightly from 2.4% to 2.3%. A downside surprise would raise the odds of another rate cut by the Reserve Bank of Australia in the near future.

Oil Markets

Oil prices continue their downward trajectory, pressured by the announced ceasefire between Iran and Israel — a development that has sharply reduced geopolitical risk premiums and the likelihood of supply disruptions from the Middle East. Analysts suggest that if the truce holds, oil prices could continue to slide in the short term. At 22:30 GMT+2, traders will focus on the American Petroleum Institute (API) inventory report; a forecast drawdown of 0.6 million barrels, if realized, could help slow the current decline in crude prices.