- Geopolitics continues to support the US dollar.
- Japan is ready to resume currency interventions.
The US dollar has gained fresh momentum following the escalation between the US and Iran. With consumer price inflation in the eurozone rising to 3.2%, the ECB’s decision to raise its deposit rate from 2% to 2.25% in June is virtually a foregone conclusion. Still, the EURUSD pair was far more strongly influenced by disappointment over events in the Middle East, which boosted demand for the greenback.
US attacks on an Iranian tanker led to Tehran bombing its regional neighbours and the Americans striking Qeshm Island. Opponents continue to insist that this kind of escalation does not constitute a breach of the ceasefire, but investors’ faith in a swift peace deal 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 being opened by that time at 22%, compared with 75% and 60% respectively on 23 May, when Donald Trump stated that a deal with Iran had largely been agreed.
The longer the conflict in the Middle East drags on, the greater the risk of a renewed upward trend in Brent prices and the higher the likelihood that high inflation will become entrenched in the US. According to Beth Hammack, President of the Cleveland Fed, if this happens, the Fed will be forced to act. As hopes for a deal between Washington and Tehran fade, the futures market has pushed the probability of a Fed rate hike in 2026 back up to 56%. Moreover, the chances of at least two hikes have risen to 15%.
This is leading to a strengthening of the US dollar not only against the euro, but also against other global currencies, including the yen. USDJPY is within touching distance of the psychologically significant 160 mark and is currently at levels seen at the turn of April and May. At that time, Japan resorted to currency interventions and pushed the rate down to 155. However, so far, officials from the Land of the Rising Sun have managed to buy time, but not to reverse the trend.
Kazuo Ueda’s latest speech ahead of the BoJ meeting could provide a catalyst for currency interventions. The probability of an overnight rate hike in June stands at 83%. Disappointing rhetoric from the central bank governor could push USDJPY above 160.
The FxPro Analyst Team