Forex Market Overview: Dollar Weakens as Central Bank Expectations Shift

The negative dynamics are developing under the influence of macroeconomic data. In May, the Personal Consumption Expenditures Price Index, which the US Federal Reserve closely monitors, increased from 3.8% to 4.1% year-on-year, while the core indicator rose from 3.3% to 3.4%, both significantly exceeding the 2.0% target. First-quarter Gross Domestic Product (GDP) reached 2.1%, well above forecasts of 1.6%. Labour market data were mixed: initial jobless claims totalled 215.0 thousand, below both forecasts of 225.0 thousand and the previous figure of 227.0 thousand. However, the four-week average increased from 223.50 thousand to 224.25 thousand, while continuing claims rose from 1.800 million to 1.821 million. These conditions allow officials to maintain hawkish rhetoric. According to the CME FedWatch Tool, traders estimate the probability of an interest rate hike in September at 80.0%, and it may not be the only increase before the end of the year. Meanwhile, New York Federal Reserve President John Williams suggested that inflation may not return to target before 2028, while Chicago Fed President Austan Goolsbee declined to speculate on when monetary tightening could begin, stating that further policy actions should not be subject to speculation.

Eurozone

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

Today, the European Central Bank (ECB) published the results of its May consumer survey on inflation expectations. EU citizens expect the Consumer Price Index to rise by 3.5% over the next 12 months, compared with 4.0% expected a month earlier, while forecasts for three and five years remained unchanged at 2.9% and 2.4%, respectively. In its accompanying statement, the regulator noted that short-term expectations had stabilised but remained significantly above levels seen before the start of the US-Iran conflict.

United Kingdom

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

On Tuesday at 08:00 (GMT+2), investors will focus on the release of first-quarter Gross Domestic Product data. According to forecasts, the figure is expected to reach 0.6% quarter-on-quarter and 1.1% year-on-year. Overall, economic growth is expected to remain stable despite elevated inflation, which reached 2.8% year-on-year in May. Against this backdrop, the Bank of England may move toward monetary tightening. In addition, the market is awaiting the economic programme of Andy Burnham, who may replace Keir Starmer as prime minister. The former mayor of Manchester previously advocated higher government spending, but more recently moved away from these views, stressing the importance of fiscal discipline.

Japan

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

June Consumer Price Index data for the Tokyo metropolitan area showed a modest acceleration in inflation: the headline figure rose from 1.4% to 1.7% year-on-year, while the core indicator increased from 1.3% to 1.6%. However, both readings have remained below the Bank of Japan’s 2.0% target for the fifth consecutive month. At the same time, progress in peace talks between the United States and Iran is expected to ease the energy crisis and further slow price growth. Against this backdrop, officials may refrain from raising interest rates in the medium term, which could put pressure on the national currency.

Australia

The Australian dollar is strengthening against the euro and yen while showing mixed dynamics against the US dollar and pound.

On Tuesday at 03:30 (GMT+2), experts will receive the minutes of the latest Reserve Bank of Australia (RBA) meeting, in which investors hope to find hints about the regulator’s future monetary policy actions. It should be recalled that in mid-June, officials kept the interest rate at 4.35%, stating that the economy was slowing amid tighter financial conditions. They also warned that borrowing costs could be raised again if inflation continues to increase.

Oil

Oil prices are declining under pressure amid expectations of a settlement of the US-Iran conflict, although prices corrected slightly upward the day before following another attack by the Islamic Revolutionary Guard Corps (IRGC) on the Singapore-flagged container ship Evergreen, which was travelling along a route not approved by Iran. Nevertheless, civilian vessel traffic through the key maritime route is gradually increasing. According to CNBC estimates, 125 ships passed through the strait between June 15 and June 21, the highest weekly figure since the conflict began at the end of February.

In addition, the asset is being negatively affected by growing instability within OPEC. Following the United Arab Emirates, Iraq announced that it may leave the cartel if the country is not granted higher crude oil production quotas.