Written by US and Iran exchange fire again
The US dollar traded higher against all but one of its major peers on Wednesday, losing ground only against the kiwi, which was bolstered by the RBNZ’s hawkish hold. The greenback extended its recovery today as new hostilities in the Middle East weighed on hopes about a permanent resolution of the conflict.
The US attacked bases in Southern Iran, with Iran retaliating by striking a US base in Kuwait. US officials said that their targets posed a threat to US forces and to commercial vessels near the Strait of Hormuz, while Iran’s Revolutionary Guard confirmed they targeted a US airbase in retaliation to the US strikes.
The hostilities came after US President Trump dismissed reports saying that Iran was willing to reopen the Strait of Hormuz in 30 days, while the US Treasury sanctioned an entity that was collecting fees for allowing the passage through the strait.
PCE inflation data in focus amid Fed hike bets
With oil prices rebounding on the news, investors are now likely to pay extra attention to the US PCE data for April, due to be released later today. Following the hotter-than-expected CPI and PPI rates for the same month, investors are now fully pricing in a quarter-point rate hike by the Fed in March 2027, with the probability of it being delivered by December resting at around 75%.
Therefore, should the PCE numbers corroborate the notion of hotter-than-expected inflation, the probability of a 2026 rate hike could further grow and the dollar may extend its latest rebound.
Gold feels the heat of investors’ inflation concerns
Gold was also driven by elevated Fed hike speculation even when headlines pointed to optimism regarding a US-Iran peace deal. It seems that investors are now concerned about inflation remaining elevated for a prolonged period even if there is further progress in the Middle East talks.
After all, with the headline PPI rate surging at 6%, it seems that CPI inflation could remain elevated in the months to come, as producer prices could translate into higher consumer prices for the products arriving to store shelves a few months after their production. What’s more, despite the latest pullback, oil prices remain well above the levels seen a year ago, keeping the year-on-year rate high, meaning that it may take some time before annual inflation rates retreat to the Fed’s 2% objective.
Is another yen intervention looming?
The yen continued to suffer against its US counterpart, with the dollar/yen pair getting closer to the 160 level. Slightly above that zone, Japanese authorities decided to step into the FX market on April 30, and thus, with officials noting that they don’t have any limitations when it comes to acting again, the risk of another intervention episode remains elevated.
However, for Japanese authorities to achieve the desired outcome, the BoJ may need to proceed with a series of rate hikes. Otherwise, any intervention-related yen gains may be quickly reversed as it was the case following the latest episode. According to Japan’s Overnight Index Swap (OIS) market, there is a 65% chance of a 25bps rate hike at the upcoming gathering on June 16, and that chance could go higher if the Tokyo CPI data, scheduled for tonight, reveals accelerating inflation for May.
Wall Street near record highs, despite fresh geopolitical tensions
On Wall Street, the Dow Jones gained some ground, while both the S&P 500 and the Nasdaq closed virtually unchanged, with the latter hitting a fresh record high after breaching the 30k mark for the first time on Tuesday.
Stock futures are slightly lower today, but they are far from suggesting nervousness due to the new hostilities in the Middle East. This confirms the notion that the Wall Street’s main driver remains the AI-euphoria. Therefore, it seems that as long as big tech giants remain willing to invest in AI projects, Wall Street could continue exploring uncharted territory, even if there are more setbacks in Middle East truce negotiations.
By XM.com
