The US dollar is weakening, with the EUR/USD reaching new highs. Yesterday’s US Consumer Price Index (CPI) was lower than expected. Today’s Producer Price Index (PPI) is forecasted at 0.2% for the headline, and initial jobless claims are estimated to be 240,000. The EUR/USD is rising, while GBP/USD initially fell due to weak data but later rebounded. USD/JPY has dropped below several moving averages, indicating a shift toward a lower bias. Geopolitical tensions are rising, particularly concerning Iran. Non-military personnel are being advised to leave Bahrain and Kuwait. There are worries that Israel might attack Iran without US approval. The International Atomic Energy Agency (IAEA) has labeled Iran as non-compliant with nuclear agreements, and US-Iran talks are set for June 15. Despite some optimism from Iran’s foreign minister, US officials, including President Trump, remain skeptical.

ECB’s Monetary Cycle Nears Completion

ECB’s Schnabel suggests that the monetary tightening phase is almost over, with stable financing conditions. Inflation is expected to ease by early 2026. Patsalides emphasized the need for flexibility in managing interest rates, while Simkus mentioned the possibility of rate cuts. Miller stated that inflation could stay near 2%. US stock futures are down, with the Nasdaq falling by 114 points. Yields on US Treasury bonds are also declining, contributing to the USD’s drop. The Fed is expected to make two rate cuts by the end of the year, with the first one likely in September. Following the lower-than-expected US CPI data, the week’s tone has shifted significantly. There is a strong expectation for a lower PPI reading of 0.2%, which would support the idea that inflation is subsiding. Jobless claims are projected to be at 240,000, slightly higher, indicating a cooling labor market. Both inflation and employment data suggest growing pressure on rate expectations. This is why the EUR/USD is strong, while pairs such as USD/JPY are reacting more sharply, having broken below various moving averages. This is not just noise; it reflects a shift toward a weaker dollar in the medium term. Schnabel’s comments align with this trend. If the monetary cycle in Europe is approaching its final tightening phase and financial conditions are stabilizing, there is little reason to expect more rate hikes. While cuts are not imminent, the tone has changed. Comments from Patsalides and Simkus highlight a flexible but not urgent approach. This indicates that fixed income and FX traders are adapting to a central bank outlook that is more balanced than earlier in the year. Regarding local inflation, Miller confirmed that the ECB’s target is within reach, and fiscal conditions are stable. This directly relates to the rebound in GBP/USD, which initially fell due to weak domestic data but then recovered as the dollar softened. This shows that relative economic data is still important, but not all data points matter equally. Market trends are now largely driven by overarching themes rather than short-term volatility.

Geopolitical Risks and Market Implications

On the geopolitical front, risks are becoming more prominent. Tensions surrounding Iran are rising, leading to significant military and non-civilian repositioning. This response follows worsening nuclear compliance issues flagged by the IAEA. The situation points to increased tensions, particularly with talks scheduled for mid-month and military escalation not being ruled out. This situation isn’t strengthening the dollar as a safe haven as one might expect. Instead, investors are reflecting their concerns through yields—Treasury markets have shown consistent declines, reinforcing what FX markets are factoring in. As equity markets, especially the Nasdaq, continue to slide, overall market risk appears shaky. With US futures under pressure and growing expectations of rate cuts, it’s no surprise that spreads are favoring the euro and, to a lesser extent, the sterling. Derivatives traders should recognize the positioning shifts happening here. We are heading into a period where volatility could further increase, especially as we approach the mid-June policy calendar. The September timeline for the first rate move is now seen as the baseline. It is no longer speculative; the bond market has shifted enough to indicate collective consensus. Two cuts by year-end seem to be a strong consensus, reflected clearly in current pricing behavior. Given this context, upcoming actions are likely to focus on confirming this narrative. A disappointing PPI or an unexpected rise in jobless claims could further drive these trends. Traders should keep an eye on open interest levels and short-term rate differentials—there are clues available, provided you know where to look. Create your live VT Markets account and start trading now.

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