Forex overview. US Dollar Seeks New Catalyst as Conflict-Led Support Fades – ForexNews.PRO
The US dollar’s upward trajectory has softened as crude oil prices experienced a slight correction. Market participants are still uncertain about the likelihood of the US becoming directly involved in the Middle East tensions. The EUR/USD pair might find a footing around the 1.150 level. In other news, the unexpected rate cut by Norges Bank yesterday opens the door for potentially two more rate reductions in 2025.
USD: Geopolitical Risk Premium Diminishes
The White House has indicated that a decision regarding potential direct military action against Iran will be made within a fortnight. This development modestly reduces the perceived probabilities of both a swift resolution and a rapid escalation of the Middle East crisis. Consequently, Brent crude prices are supported, but may lack the momentum to break through the $80 per barrel mark in the immediate term. Reports also suggest Iran is accelerating efforts to fill its oil storage facilities, aiming to maximize crude exports in anticipation of potential logistical disruptions.
The currency market has reacted to the slightly decreased chance of US intervention in Iran by re-establishing short positions in the USD, particularly against European currencies. This highlights the need for a continuous stream of geopolitically charged news that is favorable for oil prices and negative for risk sentiment to sustain dollar support. This is relevant given the prevailing market inclination towards strategic USD short positions.
Today’s macro data releases include the Philadelphia Fed survey and the Conference Board Leading Index, both anticipated to show modest improvements. The Federal Open Market Committee’s (FOMC) communication blackout concluded last night, but no speakers are scheduled until Monday.
Oil prices and the Middle East conflict remain primary drivers for currency markets. Given the current circumstances, the DXY index might stabilize at this level, provided there are no major developments.
EUR: Returning to 1.15
EUR/USD has risen back above 1.150 as markets have factored in a reduced level of geopolitical risk. Given the volatile nature of the situation in the Middle East, making a firm directional forecast is challenging. However, the persistent possibility of US involvement in the conflict could prevent the pair from aggressively retesting the 1.160 level in the near term.
Eurozone developments remain largely irrelevant for EUR/USD at this time, and the macroeconomic calendar offers minimal guidance. The EUR/USD two-year swap rate spread has remained fairly stable around 165-170 basis points since the latest European Central Bank (ECB) meeting.
Elsewhere in Europe, the Norges Bank’s 25 basis point rate cut yesterday caught markets off guard. While the conditions for a cut seemed ideal, the central bank’s move defied expectations. An additional two cuts from Norges Bank are expected, and it does not necessarily prevent further EUR/NOK gradual depreciation.
GBP: Divided Vote Suggests August BoE Cut
The pound saw little reaction to the Bank of England’s decision to hold rates yesterday. The lack of new forward guidance has been typical of recent BoE meetings, with the vote split often serving as one of the few signals of hawkish or dovish sentiment. The 6-3 vote in favor of a hold is slightly dovish, reinforcing market expectations for an August rate cut.
Only two rate cuts are expected this year, but weaker-than-expected UK economic data might push markets further towards the dovish side. There is a generally bullish outlook for EUR/GBP.
