US Dollar Strengthens as Inflation Data and Geopolitical Risks Drive Markets

Import price index data released yesterday showed the strongest annual increase in four years in February, rising from 2.6% to 3.5%, while the monthly figure accelerated from 0.6% to 1.3%. Analysts note that the upward trend began even before the outbreak of hostilities in the Middle East and is likely to keep influencing inflation expectations in the US economy over the coming months. Under these conditions, the probability that the Federal Reserve will keep monetary settings unchanged for longer, or even tighten them further, has increased significantly.

This data could have provided even stronger support for the US dollar, but the advance is being restrained by mixed signals around US-Iran peace talks. Traders are closely watching recent comments from Iranian Foreign Minister Abbas Araghchi, who said Tehran does not intend to negotiate with the White House directly, though the US ceasefire proposal will still be reviewed by senior officials. Official Tehran also warned that if a ground operation is launched, the Islamic Revolutionary Guard Corps, together with its allies, could block the Bab el-Mandeb Strait as well. This is worrying investors because it would further disrupt global energy supplies. Markets are also paying attention to the White House statement that the meeting between US President Donald Trump and Chinese President Xi Jinping is still expected to take place in Beijing on May 14–15 and is now in the final stage of preparation. The summit had originally been scheduled for late March but was postponed after the start of the US-Iran confrontation.

Eurozone

The euro is posting moderate gains against the yen and the pound, but is weakening against the US dollar.

Market participants are assessing data from research portal GfK Group. According to analysts, the consumer climate index is expected to fall from –24.8 to –28.0 points in April, a sharper drop than forecast (–27.3 points). The economic expectations sub-index is projected to decline from 6.9 points to –6.9 points, the willingness-to-buy sub-index from –8.2 points to –10.9 points, while the willingness-to-save indicator is expected to rise from 13.8 points to 18.5 points. The negative trend is largely being driven by consumer concerns over further increases in energy prices and inflation, which are already putting pressure on household budgets and will clearly affect purchasing power. Markets also noted recent comments from Bundesbank President Joachim Nagel, who said today that the European Central Bank could raise borrowing costs at its next meeting if the Middle East crisis causes a sharp acceleration in eurozone inflation. For now, most experts disagree with that view. According to the latest Reuters poll, the ECB is expected to keep rates at 2.0% throughout the year, although around one-third of economists no longer rule out a single rate hike later this year.

United Kingdom

The pound is losing ground against its main competitors — the euro, yen, and US dollar.

In the absence of major domestic releases, price action is being driven by external factors. Markets are mainly reacting to recent comments from Bank of England Monetary Policy Committee member Megan Greene, who said yesterday that she did not support a change in borrowing costs at the regulator’s last meeting, but confirmed that rising inflation expectations do indeed point to risks that consumer prices could move above the 2.0% target. She added that energy prices are unlikely to return quickly to pre-crisis levels because of damage to energy infrastructure in the Gulf region, while food prices are also likely to remain elevated for a prolonged period. Reuters also published a survey of leading economists on the next steps by the BoE, with most respondents expecting rates to remain around 3.75% through the end of the year.

Japan

The yen is weakening moderately against the US dollar and the euro, but gaining against the pound.

The market focus is on February inflation data. Core consumer prices slowed from 2.3% to 2.2%, missing the 1.6% forecast. The Bank of Japan notes that this measure excludes temporary policy-driven factors such as subsidies for school education or utility payments. Markets are also watching recent comments from former chief economist Seisaku Kameda, who said monetary tightening could come by June because rapidly rising energy prices increase the risk that consumer inflation could accelerate too sharply.

Australia

The Australian dollar is losing ground against its major peers — the euro, pound, yen, and US dollar.

Market participants and forex traders are analyzing comments from Reserve Bank of Australia Assistant Governor Christopher Kent, who warned today that the longer the Middle East conflict continues, the greater the economic losses will be. In his view, monetary authorities need to ensure that the sharp rise in energy prices does not lift consumer inflation expectations. Analysts still expect the RBA to maintain a hawkish stance this year, but not to adjust policy settings at its May meeting, preferring first to assess the economic situation after two consecutive rounds of tightening.

Oil

Oil prices resumed their advance today, supported by uncertainty around US-Iran peace talks and the risk of further escalation in the Middle East.

Overall, investors remain disappointed by the communication between the opposing sides, which continue to exchange ceasefire conditions without showing a real willingness to compromise, while aggressive rhetoric from both Washington and Tehran remains in place. Yesterday, Iranian officials said that if a ground operation is launched on their territory, attacks on neighboring Gulf states would intensify, and the Bab el-Mandeb Strait could be blocked after Hormuz. Additional support for oil prices came from comments by Russian Deputy Prime Minister Alexander Novak, who oversees the energy sector and said Russia could reintroduce a ban on gasoline exports if needed. On the other hand, gains in oil were partially capped by the latest weekly inventory report from the US Energy Information Administration. According to the report, crude oil stocks rose from 6.156 million barrels to 6.926 million barrels, distillates increased by 3.032 million barrels, while gasoline inventories fell by 2.593 million barrels.