The US dollar retreated from a two-month high on Tuesday, with the US Dollar Index (DXY) falling to around 99.85 during early European trading. The decline came as concerns over Middle East hostilities showed signs of cooling, reducing demand for safe-haven assets.
Market Focus Shifts to Inflation Data
Investors are now turning their attention to upcoming US inflation data, which could provide critical clues about the Federal Reserve's monetary policy path. The Consumer Price Index (CPI) report is scheduled for release on Wednesday, followed by the Producer Price Index (PPI) data on Thursday. These figures are expected to play a significant role in shaping expectations for future interest rate decisions.
Rate Hike Expectations Rise
Market expectations for higher US interest rates have strengthened in recent weeks. According to the CME FedWatch tool, traders are currently pricing in a 43.2% probability of a 25-basis-point rate hike in December, up sharply from approximately 14% a month ago. The shift reflects ongoing assessment of economic data and the Fed's policy outlook.
Middle East Developments Influence Sentiment
Developments in the Middle East also remained in focus. US President Donald Trump said on Tuesday that he could have a proposal regarding an agreement with Iran within days. Earlier, Israeli Prime Minister Benjamin Netanyahu stated that the conflict involving Iran and Hezbollah "has not yet ended," while noting both adversaries were weaker than before. Meanwhile, Iran announced the conclusion of its military operations against Israel but warned against further Israeli actions in southern Lebanon. The easing of immediate tensions contributed to reduced demand for traditional safe-haven assets, including the US dollar.
Strong Chinese Trade Data Supports Confidence
Economic data from China's General Administration of Customs showed stronger trade activity in May. The trade surplus widened to $105.43 billion from $84.82 billion in April. Exports increased 19.4% year-on-year, accelerating from 14.1% growth in April and surpassing market expectations of 15.0%. Imports also exceeded forecasts, rising 27.4% year-on-year compared with 25.3% previously and above the consensus estimate of 25.0%. The stronger-than-expected figures suggested continued resilience in China's external sector.
German Industrial Output Improves
In Europe, Germany's industrial sector showed signs of recovery. Data from Destatis revealed that industrial production increased by 0.4% month-on-month in April, following a 0.1% decline in March and matching market expectations. On an annual basis, industrial production declined 0.5%, an improvement from the revised 3.4% contraction in March. The data provided some support for sentiment surrounding the eurozone economy.
Major Currency Moves
The euro gained ground against the US dollar, with EUR/USD advancing toward 1.1550 during European trading. Market participants are also focused on the upcoming European Central Bank policy meeting on Thursday, where the ECB is expected to raise its benchmark interest rate for the first time in nearly three years. The British pound also strengthened, with GBP/USD recovering above 1.3350 after touching a three-week low. Meanwhile, USD/JPY remained relatively stable near 160.15, as traders continued to monitor the possibility of intervention by Japanese authorities to support the yen. Japan's Finance Minister Satsuki Katayama reiterated that the government stood ready to take decisive action if necessary.
Gold Edges Higher
Gold prices posted modest gains on Tuesday, trading near $4,340. Despite the recovery, the precious metal remained close to its lowest level since March 24. Ongoing uncertainty surrounding Middle East developments, combined with growing expectations of a potential US interest rate increase, continued to weigh on sentiment toward the yellow metal.
For more market analysis, see our coverage on Global FX Markets Stay Range-Bound as Traders Eye Inflation Data and Oil Price Risks and FTSE 100 This Week: US-Iran Tensions, UK Data, New PM, and Earnings in Focus.
This article is for informational purposes only and does not constitute financial advice.
