EUR/USD recovered from a 2.25-month low on Monday, rising by +0.08% after the dollar index (DXY00) fell from its 2-month high. The euro's latest gains come as oil prices declined by more than 1% on Monday following the announcement of a temporary halt to military strikes between Iran and Israel. According to Reuters, Iran signaled an end to its current military operations against Israel and President Trump said the two sides were looking to agree to an immediate ceasefire. The move has strengthened speculation that a final peace agreement in the Middle East may be approaching, with Pakistani Prime Minister Shehbaz Sharif stating that the "ultimate objective" of peace negotiations between Washington and Tehran is close to being achieved. Trump and Vice President JD Vance said Washington expects to declare a "complete victory" and reach a long-term settlement of the Iranian nuclear issue within the next two weeks, with Trump adding that "We are in the final stages of reaching an agreement with Iran, and we want to get this resolved." The euro's recovery was further supported by Monday's stronger-than-expected Eurozone Jun Sentix investor confidence index, which rose +3.0 to -3.4, stronger than expectations of -14.0. However, EUR/USD has struggled to more convincingly re-claim 1.1550 despite improved risk appetite, with the price action reinforcing the view that Friday's break below 1.16 was less about geopolitics and more a confirmation of a hawkish re-pricing of the Fed relative to the ECB.
EUR/USD is edging higher towards the 1.1550 level on Tuesday, supported by expectations of a hawkish ECB this week. The ECB is widely expected to raise interest rates by 25 basis points on Thursday, a move that is fully priced in after eurozone inflation accelerated to 3.2% in May. However, money markets reduced the probability of a 25-basis-point interest rate increase by the European Central Bank in June from 95% to 85% following the latest oil price decline. Markets are now discounting a +100% chance for a +25 bp rate hike by the ECB at the next policy meeting on Thursday, according to Investing.com India. Attention will focus on the ECB press conference for further clues regarding the outlook for interest rates. Any indication that policymakers remain concerned about inflation and are prepared to tighten policy further could provide additional support for the euro. However, a likely data-dependent forward guidance, coupled with a growing divergence between upwardly revised inflation and downwardly revised growth expectations, should limit the extent of any directional FX follow-through in support of the euro.
The dollar index (DXY00) fell from a 2-month high on Monday, finishing down 0.06%, giving up overnight gains as stocks pushed higher and curbed liquidity demand for the dollar. According to Reuters, the dollar has come under pressure following Trump's success in halting the exchange of military strikes between Iran and Israel, while reaffirming commitment to the diplomatic path aimed at ending the conflict. The dollar initially moved higher on Monday on carryover strength from last Friday's stronger-than-expected US May payroll report, which bolstered speculation that the next Fed move will be an interest rate increase. However, gains remain limited amid uncertainty surrounding the Middle East, which could revive safe-haven demand for the U.S. dollar. Swaps markets are discounting the odds at +3% for a +25 bp rate cut hike at the next FOMC meeting on June 16-17, according to Investing.com India. Markets are currently pricing around a 50% probability of a 25-basis-point Fed rate hike before the end of the year. The closer the yen falls to 160 per dollar, the greater the likelihood that Japanese authorities will intervene in forex markets to prop up the yen, as they have done several times recently when the yen fell below that level.
German April factory orders fell -3.8% month-on-month, weaker than expectations of -2.0% month-on-month, presenting a bearish outlook for the eurozone's largest economy. As reported by Investing.com India, the weaker-than-expected German April factory orders report was negative for the euro, offsetting some of the positive momentum from the improved investor confidence data. The German industrial production rose 0.4% month-on-month, marking its first increase since the conflict in the Middle East began, offering some encouragement for Europe's largest economy, although broader growth indicators remain subdued. Lower global oil prices are also helping to ease concerns about accelerating inflation, supporting expectations that the European Central Bank may keep its monetary policy tools unchanged for an extended period this year. A test of 1.1450 this week remains on the table should growth forecast revisions prove particularly negative, especially in light of recent underwhelming euro area macro data including Germany's factory orders.
Swaps markets are discounting the odds at +3% for a +25 bp rate cut hike at the next FOMC meeting on June 16-17, according to Investing.com India. Markets are currently pricing around a 50% probability of a 25-basis-point Fed rate hike before the end of the year. Stronger-than-expected inflation data could reinforce those expectations, supporting Treasury yields and the dollar. However, the closer the yen falls to 160 per dollar, the greater the likelihood that Japanese authorities will intervene in forex markets to prop up the yen, as they have done several times recently when the yen fell below that level. Reuters sources indicated that the European Central Bank is still highly likely to raise interest rates in June, given inflation forecasts that continue to point toward an undesirable scenario. The technical backdrop continues to favour the dollar moderately, supported by a relatively stronger US growth outlook and higher US real yields, with external forces remaining the dominant driver of risk-sensitive currencies like the pound.
