Dollar Strengthens as Hawkish Fed Signals and U.S.-Iran Deal Pressure Oil

As expected, the regulator under the chairmanship of its new head, Kevin Warsh, kept the interest rate in the 3.50–3.75% range for the fourth consecutive time, with the decision made unanimously. The key event was a radical change in the “dot plot” and officials’ rhetoric, which turned out to be significantly more hawkish than expected: in particular, the June chart removed the possibility of a reduction in borrowing costs in 2026, although one adjustment of –25 basis points had previously been expected. The accompanying statement noted that economic activity is expanding at a solid pace despite uncertainty partly caused by the conflict in the Middle East, while inflation remains elevated relative to the 2.0% target, reflecting the hydrocarbon supply crisis. Thus, officials view price pressure as persistent despite the correction in oil prices after the memorandum of understanding between the United States and Iran was concluded.

Eurozone

The euro is strengthening against the pound but weakening against the U.S. dollar and the yen. Against the backdrop of the Middle East conflict, which has been ongoing since late February, and the blockade of the Strait of Hormuz, the European Central Bank made its first decision in three years to raise the interest rate by 25 basis points and adjusted its inflation forecasts to 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028.

In May, the EU consumer price index rose to 0.1% month-on-month and from 3.0% to 3.2% year-on-year, significantly above the 2.0% target. However, investors are most concerned about the core indicator, which excludes food and fuel prices and increased to 0.3% and 2.6%, respectively. These data indicate that the persistently high cost of hydrocarbons caused by their shortage has triggered upward dynamics in other sectors of the economy.

United Kingdom

The pound is weakening against the euro, the U.S. dollar, and the yen. The pound received support after the publication of labor market statistics: over the three-month period, employment increased by 100.0 thousand, which was 20.0 thousand better than analysts’ forecasts, while in March it had already adjusted by 148.0 thousand. The unemployment rate for the same period declined from 5.0% to 4.9%, giving the Bank of England more room to change the direction of monetary policy.

At the same time, the number of jobless claims rose from 26.5 thousand to 31.2 thousand, while analysts had expected 25.8 thousand. Today, market participants are awaiting the results of the Bank of England monetary policy meeting: according to forecasts, borrowing costs will be fixed near 3.75%, but, as before, comments from financial authorities and the distribution of votes within the Committee will have a significant impact on the national currency. Seven meeting participants are likely to support keeping the current parameters unchanged, while two are expected to vote against, with Chief Economist Huw Pill and external member Megan Greene likely to support a 25-basis-point increase.

Australia

The Australian dollar is strengthening against the yen, the U.S. dollar, the euro, and the pound. This week, the Reserve Bank of Australia unanimously decided to keep the interest rate near 4.35%, for the first time this year after three consecutive increases in February, March, and May, which brought the rate from 3.60% to its current level. In their statement, officials acknowledged that financial conditions had tightened and that there were signs of slowing growth in consumer spending, as well as a shift in momentum in the housing market. However, headline and core inflation remain “still too high,” so the hawkish cycle will resume if necessary.

Japan

The yen is strengthening against the euro and the pound but declining against the U.S. dollar. The day before the Fed meeting, the Bank of Japan raised its key rate to 1.00%, the highest level since 1995, marking the fourth increase since abandoning negative borrowing costs in 2024. However, even this historic decision failed to provide sustained support for the yen, as it had already been priced in. Officials noted that the national economy continues to recover moderately, but the rise in “black gold” prices due to the closure of the Strait of Hormuz is putting pressure on corporate profits and household incomes, separately pointing to the need to monitor global financial conditions and external demand, including the technology cycle related to artificial intelligence (AI).

Oil

The bearish momentum in the oil market is intensifying after a consensus was reached on a framework peace agreement between the United States and Iran, the in-person signing of which is expected to take place tomorrow in the Swiss Alps.

A key point of the document, in particular, will be the unblocking of the Strait of Hormuz, through which around 20.0% of global “black gold” volumes were transported before the acute phase of the conflict began. Nevertheless, the Baltic and International Maritime Council (BIMCO) considers crossing this key route very risky due to sea mines. At the same time, according to estimates, a return to pre-war supply volumes can realistically be expected only in 2027 and only if the agreement is observed normally and production recovers quickly. Market participants also expect the announced lifting of sanctions on Iran’s oil sector, including the removal of the embargo, which will undoubtedly significantly increase the supply of “black gold.” Before the start of hostilities, Iran produced 3.5 million barrels per day and exported 1.5–1.9 million barrels per day, mainly to China, but now the number of potential buyers may increase significantly.