- Geopolitics continue to support the US dollar.
- Japan is ready to resume monetary interventions.
The US dollar has gained new momentum following the escalation between the United States and Iran. With consumer price inflation in the eurozone rising to 3.2%, the ECB's decision to increase its deposit rate from 2% to 2.25% in June is practically a foregone conclusion. Still, the pair was much more influenced by disappointment over developments in the Middle East, which boosted demand for the dollar.
US attacks on an Iranian oil tanker led to Tehran bombing its regional neighbors and the Americans attacking the island of Qeshm. Opponents continue to insist that this type of escalation does not constitute a violation of the ceasefire, but investors' faith in a quick peace agreement is fading. Polymarket puts the probability of peace being achieved by the end of June at 27% and the chance of the Strait of Hormuz opening by then at 22%, compared to 75% and 60% respectively on May 23, when Donald Trump claimed a deal had largely been reached with Iran.
The longer the conflict in the Middle East continues, the greater the risk that the upward trend will be renewed and the greater the likelihood that high inflation will take hold in the United States. According to Beth Hammack, president of the Cleveland Fed, if this happens, the Fed will be forced to act. As hopes of a deal between Washington and Tehran fade, the futures market has raised the probability of a Fed rate hike in 2026 to 56%. Furthermore, the chances of at least two hikes have increased to 15%.
This is causing the US dollar to strengthen not only against the euro, but also against other world currencies, including the yen. is within striking distance of the psychologically significant mark of 160 and is currently at the levels seen in late April and May. At that time, Japan resorted to monetary interventions and lowered the exchange rate to 155. However, so far, officials in the Land of the Rising Sun have managed to buy time, but not reverse the trend.
Kazuo Ueda's last speech before the BoJ meeting could serve as a catalyst for monetary interventions. The probability of an overnight rate hike in June is 83%. Disappointing rhetoric from the central bank governor could push USDJPY above 160.
He FxPro Analyst team
