- USDJPY has returned to the area of previous interventions.
- The ECB is moving towards a rate hike in June.
The US dollar retreated on Friday amid new record highs for stock indices and rumours of amendments to the US-Iran agreement. However, tit-for-tat exchanges between the adversaries pushed the dollar index back into the support zone of the past two weeks, near 99. Investors welcomed the de-escalation in the Middle East, although they cannot fully count on peace, which kept the dollar steady but did not prevent shares from creeping higher.
Michelle Bowman of the Fed believes that resolving the conflict will eliminate supply disruptions. As a result, the oil crisis will have only a temporary impact on inflation and a minimal effect on economic activity. The futures market puts the odds of a Fed rate hike in 2026 at 50-50. The rhetoric outlined above suggests that the FOMC has not ruled out a return to rate cuts, which would weaken the dollar.
Isabel Schnabel of the ECB, on the other hand, argues that the bank cannot stand idly by in the face of an oil shock. The European Central Bank will have to respond, even if the conflict in the Middle East were to end right now. Markets have priced in an ECB rate hike in June, followed by one or two further moves by the end of the year. This divergence, coupled with falling demand for the US dollar as a safe-haven asset, is paving the way for EURUSD to head north, provided, of course, that the conflict in the Middle East comes to an end.
The dollar’s mixed performance is not deterring USDJPY bulls from testing the Japanese authorities’ resolve. The pair is approaching the psychologically important 160 mark, as asset managers and hedge funds have increased their net short positions in the yen to their highest levels since July 2024.
Japan has spent ¥11.7 trillion on currency interventions, equivalent to $74 billion. The figure exceeded the ¥10 trillion that the market expected. Meanwhile, Finance Minister Satsuki Katayama said the authorities are prepared to intervene again in pricing if volatility rises or speculation is detected. Investors are bracing for a new showdown with the Tokyo authorities.
Gold retreated after a two-day rally. Deutsche Bank forecasts that the yield on 10-year Treasury bonds will rise to 4.7% by the end of the year, as the Fed keeps rates unchanged. This environment of a stable dollar and rising Treasury yields is unfavourable for the precious metal.
The FxPro Analyst Team