The US Dollar Index (DXY) hovered around 100.00, weighed by firmer risk appetite even as US data stayed resilient, after reports that Iran had ended military operations against Israel. EUR/USD held near 1.1530, with Eurozone mood improving as the Sentix Investor Confidence index rose to -13.4 in June from -16.4, while focus turns to Thursday’s European Central Bank (ECB) rate decision, where markets are positioned for another hike. GBP/USD traded near 1.3340, supported by a softer dollar tone and steadier sentiment, while USD/JPY was subdued around 160.20 as Japan’s Q1 growth of 0.5% QoQ and 1.8% annualised offered support to the yen despite reduced demand for traditional havens.
AUD/USD edged up towards 0.7050, tracking the broader bid for commodity-linked currencies. In commodities, WTI crude traded near $91.10 a barrel, easing after recent swings as the Iran headline reduced immediate supply anxiety, while gold was little changed around $4,330 as geopolitical pressure ebbed. The calendar ahead includes China CPI and PPI on Tuesday, US CPI on Wednesday, then the ECB decision alongside US PPI and US initial jobless claims on Thursday, followed by UK GDP, Germany’s final CPI and the US Michigan Consumer Sentiment Index on Friday.
Dollar Outlook and Major Currency Themes
We see the US Dollar Index balancing on a knife’s edge near the 100.00 level, caught between a strong US economy and a better global mood. The immediate calm in the Middle East is causing this dollar softness, but we believe the real decider will be tomorrow’s US CPI data. Given that core inflation has remained stubbornly above 3.1% for the past quarter, a hot number could quickly send the dollar higher.
The Euro is finding support from positive sentiment and the market fully pricing in a 25 basis point rate hike from the European Central Bank this Thursday. We advise traders to look past the hike itself and focus on the ECB’s forward guidance during the press conference. Any signal that this might be the last hike in the cycle could cap the Euro’s rally around the 1.1550 resistance level.
Currencies like the Australian Dollar and British Pound are benefiting from this “risk-on” sentiment, which we can see confirmed by the VIX volatility index recently dipping below 14. This optimism, however, is fragile and highly dependent on US inflation data not surprising to the upside. A hotter-than-expected CPI report would likely reverse these recent gains against the Greenback.
We are paying close attention to the USD/JPY pair, which is holding at a very high level near 160.20. While Japan’s recent 1.8% annualized growth is supporting the yen, the massive interest rate difference with the US keeps the pair elevated. Historically, Japanese officials have issued warnings at these levels, so we should be prepared for potential verbal intervention to strengthen the yen.
Commodity Moves and Market Risks
The drop in WTI crude oil to around $91 per barrel is a direct reaction to easing tensions between Iran and Israel. However, we see limited downside from here as the latest Energy Information Administration report showed only a modest build in US inventories, suggesting demand remains robust. We feel the greater risk is a price spike if geopolitical headlines flare up again.
Gold’s sideways trading near $4,330 shows it is torn between lower safe-haven demand and the looming inflation numbers. A strong US CPI figure would likely increase real interest rates, making non-yielding gold less attractive to hold. We see a potential move down towards the $4,250 support level if the data reinforces the Federal Reserve’s hawkish stance.
