- The ECB intends to raise interest rates in June.
- The US dollar is holding steady against other G10 currencies.
The US dollar weakened as Iran signalled that mutual air strikes would not derail negotiations. Oil resumed its decline, while the S&P 500 hit a new record high. This created a favourable backdrop for EURUSD. The futures market, for the first time in several days, has reduced the probability of a federal funds rate hike in 2026 to less than 50%. Investors believe the Fed will adopt a wait-and-see approach, which, against the hawkish ECB, plays in the euro’s favour.
The ECB’s Isabel Schnabel stated that the Central Bank must tighten monetary policy at its next meeting, regardless of how events unfold in the Middle East. The oil market has been damaged, inflation has risen; it is time to hike.
Hopes for a de-escalation of the US-Iran conflict are undermining demand for the USD as a safe-haven. Also, the greenback is losing support from oil. This is being driven by a reduction in Chinese crude imports to 6.6 million bpd, the lowest level since 2016.
At the same time, uncertainty over the outcome of talks between Washington and Tehran is preventing the USD index from falling faster. This is all the more so given that many of the greenback’s rivals have their own vulnerabilities. For instance, the slowdown in consumer prices in Australia from 4.6% to 4.2% y/y sent the Aussie tumbling. The futures market immediately reduced the odds of an RBA rate hike in August from 64% to 50%.
Comments by BoJ Governor Kazuo Ueda that inflation in Japan could become permanent due to second-round effects drew a mixed reaction. Derivatives continue to give more than a 75% chance of a rate hike in June. However, the mismatch between the government’s accommodative fiscal policy and the central bank’s tightening is inspiring USDJPY bulls to make new assaults.
Yen supporters remain undeterred. According to Eurizon SLJ Capital, the Japanese currency will strengthen against the US dollar. The main reason cited is the repatriation of capital by Japanese investors. The strength of the domestic economy, higher BoJ rates and business-friendly fiscal stimulus from Sanae Takaichi’s government will provide the necessary impetus for this.
The FxPro Analyst Team