The United States dollar index (DXY) opened the week 0.2% higher at 99.02, underpinned by a spike in safe-haven demand after President Donald Trump announced the bombing of three Iranian nuclear sites Natanz, Isfahan, and Fordo, over the weekend.
As geopolitical risks surged, market participants sought refuge in the Greenback, allowing it to hold above key technical support levels.
While the conflict in the Middle East supported short-term gains, broader upside for the U.S. dollar remains constrained by growing expectations of Federal Reserve rate cuts later this year.
Despite holding rates steady at its recent meeting, Fed Chair Jerome Powell reiterated the bank’s data-dependent approach and warned of inflationary risks tied to potential tariff measures. Markets continue to price in a rate cut as early as September.
Diverging global monetary policy paths have further complicated the FX outlook. The Swiss National Bank and Norges Bank both delivered surprise cuts last week, while the European Central Bank (ECB), and the Bank of England (BoE) adopted a more cautious tone, creating further temporary support for the Greenback.
Euro Gains Erased Amid Dollar Strength, Trade Jitters
The EUR/USD pair slipped 0.3% at the week’s open, giving back last week’s gains following renewed geopolitical tensions and broad U.S. dollar strength.
Over the weekend, President Trump’s military action in Iran reignited safe-haven flows, benefitting the dollar.
Meanwhile, diverging rhetoric within the Fed clouded rate expectations: Governor Christopher Waller backed a July cut, but the central bank’s decision to hold rates steady signalled a preference for patience.
In Europe, negotiations over a long-awaited EU–US trade deal remain unresolved as the 9 July deadline approaches. The lack of progress continues to weigh on the Euro’s upside potential.
Economic data offered little reprieve. The EU Consumer Confidence Index disappointed, but markets largely shrugged off the soft print. Traders instead focused on Fed-related headlines and escalating geopolitical risks.
Australian Dollar Slumps to 5-Month Low
AUD/USD declined below 0.6440, trading at a five-month low as the Greenback climbed on safe-haven flows tied to the Middle East conflict.
Risk-off sentiment, dovish Reserve Bank of Australia expectations, and weak domestic data added to the downward pressure on the Australian dollar.
The Federal Reserve’s recent tone reinforced the potential for gradual, data-led easing, bolstering the U.S. dollar.
Higher oil prices, fuelled by the Iran strikes, raised inflation concerns and reinforced the case for sustained higher rates globally.
Domestically, Australian Treasurer Jim Chalmers highlighted long-term structural economic challenges last week. His call for reform coincided with soft labour data, which showed a 2.5K drop in May jobs versus an expected 25K gain.
Sterling Rebounds Despite Dovish BoE
The Pound Sterling started lower despite a mild recovery from monthly lows against the U.S. dollar last week.
GBP/USD fell below 1.3400 amid geopolitical turmoil in the Middle East and a hawkish Fed hold, both of which bolstered the Greenback.
Despite the BoE holding rates steady at 4.25%, Governor Andrew Bailey hinted at future cuts. The voting breakdown was notably dovish, with six out of nine MPC members favouring no change and three voting for a 25 basis point cut—more dovish than the 7-2 split expected.
UK economic data exacerbated the weakness. May retail sales fell 2.7%, sharply below expectations for a 0.5% decline. Core retail sales also disappointed.
However, as geopolitical and trade concerns weighed heavier on risk sentiment globally, Sterling managed to find some support heading into the week. Traders now await testimony from Fed Chair Powell and BoE Governor Bailey, along with the release of U.S. PCE inflation data on Friday.
Yen Weakens Despite Strong CPI
USD/JPY climbed to near 146.00, marking a three-week high as the Japanese Yen faltered despite stronger domestic inflation data.
Japan’s national CPI rose 3.5% year-on-year in May, slightly below April’s 3.6%, but core CPI surged to 3.7%, its fastest pace since January 2023.
Nevertheless, the Yen weakened as markets viewed the Bank of Japan’s tightening path as gradual. Governor Kazuo Ueda said the BoJ could raise rates if inflation remains on track but acknowledged the potential for the underlying inflation to stagnate.
The Fed’s own messaging, via its latest Summary of Economic Projections reaffirmed a cautious approach. Officials noted persistent inflation and uncertainty from tariffs, maintaining expectations for two rate cuts this year while trimming longer-term forecasts.
U.S. data, including the stagnant Philadelphia Fed Manufacturing Index and a declining employment sub-index, added nuance to the rate outlook. However, the greenback remained supported, particularly against low-yielders like the Yen.
Key Economic Events in the Week Ahead
On Monday, investors will analyse S&P Global Purchasing Managers’ Index (PMI) data from Australia, Japan, the Eurozone, the United Kingdom, and the United States.
Additionally, speeches are scheduled from several Federal Reserve officials, including Governors Christopher Waller, Adriana Kugler, and Michelle Bowman. The United States will also release existing home sales figures.
Tuesday brings further important releases, beginning with consumer confidence data from South Korea. Canada will publish its latest inflation figures, while in the United States, the focus will be on the home price index, the Conference Board's consumer confidence reading, and the first of two testimonies this week from Federal Reserve Chair Jerome Powell.
On Wednesday, New Zealand will report its balance of trade data, and Australia will release its monthly Consumer Price Index (CPI) indicator. Japan will publish the Bank of Japan’s (BoJ) summary of opinions, offering further insight into policymakers’ views.
In the U.S., data on new home sales and building permits will be released, alongside Powell’s second testimony to Congress.
Thursday’s attention shifts to business confidence figures from South Korea. In the United States, a slate of data is due, including durable goods orders, the final reading of gross domestic product (GDP) for the quarter, corporate profit data, the goods trade balance, and retail and wholesale inventory figures. Pending home sales data is also scheduled for release.
To close out the week, Friday will see Japan publish its unemployment rate and retail sales data. In the United Kingdom, the Office for National Statistics will release the current account balance and updated GDP figures.
The United States will report on the core Personal Consumption Expenditures (PCE) price index—closely watched by the Federal Reserve — as well as personal income and spending data and the final reading of the University of Michigan’s consumer sentiment index. Canada will also publish its GDP report.
