Dollar Weakens as U.S.-Iran Framework Deal Pressures Oil and Shifts Forex Sentiment

Investors and forex traders have noticeably reduced their investments in dollar-denominated assets, as the situation in the Middle East remains in focus: on Sunday, a framework agreement was reached between the United States and Iran, under which the opponents’ military actions will be halted and the naval blockade of the Islamic Republic’s ports will be lifted. The signing of the document is scheduled for June 19 in Switzerland. Meanwhile, on Wednesday, the two-day meeting of the U.S. Federal Reserve will conclude, the first under new Chair Kevin Warsh, a supporter of dovish rhetoric, from whom the market expects measures to combat significantly increased inflation. According to the Chicago Mercantile Exchange (CME) FedWatch Tool, the interest rate will remain in the 3.50–3.75% range with a probability of 96.6%, while the possibility of monetary policy tightening in December has decreased from 50.0% last week to 40.3%.

Eurozone

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

The positive dynamics are supported by the report on the industrial sector: seasonally adjusted industrial production in the eurozone changed from 0.4% to 0.1% month-on-month in April and from –2.8% to 0.3% year-on-year. According to preliminary data, the trade deficit reached 1.0 billion euros compared with a surplus of 8.7 billion euros in the same period last year: exports increased by 5.0% to 255.4 billion euros, while imports rose by 9.3% to 256.4 billion euros.

United Kingdom

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

According to a report by research company Rightmove Group Ltd., housing prices in the first two weeks of June declined by –0.6%, or –2.113 thousand pounds, to 376.191 thousand pounds, marking the largest drop in the last 14 years. The average interest rate on a two-year fixed mortgage decreased from 5.18% to 5.07%, reducing the monthly payment by around 30.0 pounds. Buyer demand in May changed by –10.0% compared with last year. Higher long-term mortgage rates are weighing on consumer activity, while a wider choice of properties is slowing the pace of transactions. The number of property contracts fell by 6.0% compared with last year but generally remains in line with recent years’ figures.

Japan

The yen is weakening against the euro and the pound but shows mixed dynamics against the U.S. dollar.

Tomorrow at 05:00 (GMT+2), the Bank of Japan will announce its interest rate decision, which it is expected to raise to 1.00%: apparently, the meeting will take place without the direct participation of hospitalized Governor Kazuo Ueda, while experts believe that officials have already reached a consensus and the meeting will be limited to confirming a 25-basis-point increase to the highest level since 1995. Nevertheless, significant progress in resolving the Middle East conflict has already led to lower oil prices, which could soften the consequences of the energy crisis and remove the need for monetary policy tightening. Investor activity remains low, but if borrowing costs increase, a local strengthening of the yen is likely.

Australia

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

Tomorrow at 06:30 (GMT+2), the Reserve Bank of Australia will announce its interest rate decision, and experts tend to believe that the rate will remain at 4.35% after three consecutive increases since the beginning of the year. The regulator has to balance still-high consumer prices, which remain well above the 2.0–3.0% target range, with a slowing economy, as indicated by declining consumer spending and cooling in the housing market. In addition, a pause in adjusting borrowing costs may be a response to the significantly increased likelihood of a peaceful settlement in the Middle East and, consequently, the normalization of oil prices.

Oil

Oil quotes are actively declining, trading at 82.00 in response to easing tensions in the Middle East after U.S. President Donald Trump reported that an agreement had been reached with Tehran. According to reports by the Iranian outlet Mehr, the draft agreement provides for the Islamic Republic’s full commitment to the terms of nuclear non-proliferation, as well as the launch of a 60-day negotiation process aimed at the final settlement of all issues related to the nuclear program. On the U.S. side, the document provides for the complete lifting of all sanctions, including resolutions of the United Nations and the International Atomic Energy Agency, as well as the immediate cessation of hostilities on all fronts, including in Lebanon. In addition, the agreement mentions the unblocking of the Strait of Hormuz and Iranian ports, while Washington itself undertakes not to increase its military presence in the Middle East and not to impose new restrictions on Iran, as well as to provide access to 24.0 billion dollars in “frozen” Iranian assets and to a recovery fund of up to 300.0 billion dollars.