Dollar Mixed as Middle East Escalation and U.S. Inflation Data Drive Forex Volatility

Investors and forex traders remain fairly active in the middle of the week, with the escalation of tensions in the Persian Gulf region still in focus. Overnight from Tuesday to Wednesday, U.S. armed forces attacked Iranian territory, which, according to President Donald Trump, was a response to the downing of an American helicopter by the Islamic Republic over the Strait of Hormuz. In response, the Islamic Revolutionary Guard Corps launched missiles at enemy bases in Jordan, Kuwait, and Bahrain.

Investors are assessing the inflation data released to the market: in May, the consumer price index rose by 0.2% month-on-month, as expected, bringing the annual figure to a three-year high of 4.2%. The core indicator came in at 2.9%, increasing the likelihood of tighter monetary policy from the U.S. Federal Reserve.

Eurozone

The euro is weakening against the pound but strengthening against the U.S. dollar and the yen. The neutral tone of the single currency supports its gains against competitors, which may be linked to expectations of tighter monetary policy from the European Central Bank at Thursday’s meeting. Bank of France Governor Emmanuel Moulin stated that there is an opportunity to strengthen the euro’s status as a global currency, which would require safe assets backed by it, but attracting them requires a stable economy. In this regard, the official urged Council members to shift toward hawkish rhetoric, indirectly confirming plans to raise the interest rate tomorrow. In addition, Moulin noted that the French regulator plans to revise its consumer price index forecast in the near future, and that the ECB needs to respond to accelerating inflation.

United Kingdom

The pound is strengthening against the yen, the euro, and the U.S. dollar.

Analysts still tend to believe that the Bank of England will take a wait-and-see approach in the summer, refraining from tightening monetary policy until autumn. Experts justify this view with positive retail sales dynamics: according to the British Retail Consortium (BRC), the indicator rose from 1.0% to 3.7% year-on-year in May, with food sales accelerating by 3.9%, non-food sales by 3.5%, and online sales by 10.6%. Moreover, the share of online deliveries increased from 36.0% to 38.0%, reflecting strong consumer demand.

Japan

The yen is weakening against the U.S. dollar, the euro, and the pound.

The currency is trading close to annual lows, and investors have noticeably reduced trading volumes, expecting the Bank of Japan to intervene in the market at any moment. Moreover, the probability of monetary policy tightening at the regulator’s next meeting has increased: according to a Reuters survey, an interest rate hike of 25 basis points is expected this month, with a similar adjustment in the fourth quarter, as inflation risks are rising. 94.0% of respondents expect the rate to reach 1.0% by the end of the year, compared with 65.0% in May, 99.0% expect this as early as September, and 74.0% believe borrowing costs will rise to 1.25% in the final quarter.

Australia

The Australian dollar is declining against the yen, the U.S. currency, the euro, and the pound. Macroeconomic statistics point to a slowdown in a key sector of the economy: the total number of approved residential construction projects fell by 3.4% to 16.710K, private-sector house approvals declined by 1.0% to 10.088K, and dwellings excluding houses dropped by 3.6% to 6.403K. The total value of residential buildings decreased by 0.3% to 10.89 billion Australian dollars, while the value of non-residential buildings increased by 29.4% to 7.75 billion Australian dollars.

Oil

Oil quotes are slowly declining, trading around 91.00. Prices are reacting only slightly to developments in the Middle East conflict, where on Tuesday the Islamic Revolutionary Guard Corps destroyed an American helicopter, prompting U.S. armed forces to strike Qeshm Island and air defense positions of the Islamic Republic. Tehran continued the escalation, resulting in damage to enemy bases in Jordan, Kuwait, and Bahrain, which does not support a quick diplomatic settlement of the situation. Meanwhile, fuel reserves continue to decline: according to the American Petroleum Institute (API), weekly crude oil inventories fell by 9.119 million barrels, extending the negative trend for the second month.