- Rumors of talks between the United States and Iran are dragging down the USD index.
- The ECB intends to act decisively by raising interest rates.
The US dollar continued to retreat following Donald Trump's statement that Iran is seeking a deal. Investors have encountered this type of rhetoric from the US president many times since April, and each time, the escalation was followed by a de-escalation. A rise and pullback from local highs, along with a fall, are creating headwinds for the USD index.
The rise in oil has revived the prospect of monetary tightening in European countries. The futures market estimates that the probability of two rounds of monetary tightening by the ECB and the Bank of England in 2026 is 50%. The probability that the European Central Bank will increase its deposit rate in September is 90%. Minutes from their June meeting noted that inflation would remain above the 2% target in the first half of 2027, even if monetary policy were tightened three times by then.
The ECB came under heavy criticism for being slow to raise interest rates in 2022 amid rising consumer prices. He doesn't want to make the same mistake again, although the situation now is different from four years ago, with the eurozone economy weaker and borrowing costs higher. However, fears that rising energy prices are taking root in core inflation and inflationary expectations are pushing the European Central Bank to take decisive action.
The futures market is pricing in just a 40% chance of two Fed rate hikes, lower than the ECB, and playing into the hands of the bulls on .
In fact, markets are focusing on TACO more than central bank actions. Brent has stabilized above $76 per barrel. Although traffic in the Strait of Hormuz has stopped and the number of tankers passing through it has fallen from 30 to 50 in recent days, hopes of talks between the United States and Iran are preventing oil prices from rising further.
The weakness of the US dollar has allowed the bears to mount a counterattack. Satsuki Katayama further pushed the recoil. The Finance Minister's call to pension funds, including GPIF, to increase their investments in Japanese assets proved more effective than verbal interventions.
He FxPro Analyst team
