Key Takeaways:
The US dollar swung through a second day of choppy trading Tuesday as conflicting signals from US-Iran negotiations kept currency markets locked in a holding pattern, with EUR/USD pinned near 1.16 and the dollar index hovering around 99.
"The euro hasnt really reacted though the rates market now prices 23 basis points of hikes at the June 11 ECB meeting," said Kit Juckes, chief foreign exchange strategist at Societe Generale. "With the consensus forecast for eurozone GDP this year down to 0.8 percent, the contrast with the US at 2.1 percent remains striking."
EUR/USD traded at 1.1620 late Tuesday, little changed from Monday, after briefly slipping below 1.16 during the Asian session. The pair has been locked in a 1.1550-to-1.1650 range for the past two weeks as traders weigh a hawkish Federal Reserve against a deteriorating eurozone growth outlook. German composite PMI held below the 50 expansion threshold at 48.6 in May, while manufacturing slipped back into contraction at 49.9 from 51.4, according to HCOB data. The eurozone-wide composite reading is expected to remain in contraction territory when released later this week.
The divergence between the two economies is sharpening. Markets now price a 25-basis-point Fed rate hike by year-end, according to the CME FedWatch tool, while the European Central Bank faces a stagflationary bind — slowing growth alongside persistent inflation from elevated energy costs. ECB board member Isabel Schnabel told Reuters the central bank should raise rates in June, even if peace talks with Iran yield a deal, as high energy prices are spilling into the broader economy. The rates market has responded by pricing 23 basis points of tightening at the June 11 meeting.
The Geopolitical Wildcard
The Strait of Hormuz remains the dominant risk factor for currency markets. Oil prices swung violently this week — Brent crude fell more than 6 percent Monday on optimism about a potential US-Iran deal, then rebounded above $97 a barrel Tuesday after President Donald Trump warned further military action remained possible. Brent has traded at roughly 50 percent above pre-conflict levels, sustaining inflationary pressure that keeps central banks on alert.
The dollar index, which measures the greenback against six major peers, held near 99.0 after touching a session low of 98.9. The dollar has drawn support from both its safe-haven status and the hawkish repricing of Fed expectations. Minutes from the FOMCs April meeting showed most officials still see the possibility of additional rate hikes if inflation stays above the 2 percent target.
USD/JPY traded at 142.80, down 0.3 percent, as the yen found support from Bank of Japan signals that further rate hikes remain on the table. USD/CAD edged up 0.2 percent to 1.3680, with the loonie pressured by the volatile oil backdrop and Canadas exposure to commodity price swings.
What Comes Next
Societe Generale forecasts EUR/USD at 1.14 by year-end but acknowledges that a credible extension of the cease-fire could initially send the pair back toward 1.18. CFTC positioning data shows euro longs have settled to a modest size after a sharp reduction in February and April, suggesting the market is not heavily positioned for a breakout in either direction.
The next major catalyst comes Thursday with the US core PCE price index release, the Feds preferred inflation gauge. A reading above the 0.3 percent monthly consensus would reinforce the hawkish Fed narrative and likely push EUR/USD toward the lower end of its range. On the geopolitical front, any concrete progress — or setback — in US-Iran talks will drive the next leg in the dollar, with oil prices as the transmission mechanism.
This article is for informational purposes only and does not constitute investment advice.
