The main story in FX remains the rapidly evolving Middle East conflict. If oil prices correct further due to perceived limited supply risk, the can follow suit and move lower. However, some USD-supportive trade news may emerge from the G7 summit in Canada. Elsewhere, the Bank of Japan kept rates on hold, with the yen muted on hawkish signals
USD: Trade Versus Geopolitical News
The situation in Israel and Iran has shown few signs of de-escalation, and while that is offering intermittent support to the dollar, it has so far failed to generate a major rebound in the greenback. The main geopolitics-FX channel remains oil, whose price action suggests markets believe the worst of the impact may be past us.
While a risk premium on remains warranted for now, investors look minded to gradually scale it back unless they see evidence of serious supply disruptions. The US is attempting to broker some talks between Iran and Israel, and any signs of de-escalation should harm the dollar from here.
What we think is more likely to have a positive USD impact is the G7 summit in Canada.
Today, we can see most headlines centred on trade discussions, and Trump has in the past tended to turn less hawkish on protectionism after direct talks with foreign leaders. Any indications that the 90-day tariff pause will be extended should offer decent support to the dollar.
On the data side, the US releases figures for May after a surprisingly big drop in the Empire index yesterday, which confirmed that there are still mostly negatives from US tariffs for US manufacturers.
We see some upside risks for the dollar today, given the possibility of constructive remarks on trade coming from the G7 summit. However, with the announcement looming tomorrow, there could be more cautiousness in chasing moves in either direction in USD crosses.
Elsewhere, the move is fairly muted, rising against the dollar to 144.46 (vs 145 previously) then staying range-bound, and futures dropped around 0.1% after the Bank of Japan’s decision to keep its policy rate at 0.5% and to slow the JGB tapering from April 2026. Both decisions are in line with the market consensus.
The BoJ will reduce JGB purchases by 200bn per quarter starting from April 2026. But there was one dissenting voter, and there will be a meeting between the MoF and PDs later this week, which may create more volatility. So, this might have given some cautiousness to the JGB market.
The BoJ’s JGB hold on the short end is relatively smaller than the long end; thus, quantitative tightening has a much bigger impact on market rates. Slowing QT doesn’t necessarily signal a slowdown of rate hikes by the BoJ. To sum up, the BoJ’s decision was in line with the market consensus, and the market’s initial reaction seems a bit limited.
EUR: ZEW Might Underwhelm
price action is so far endorsing our call that markets are not ready to take the pair much above 1.160 just yet. The upside risks aren’t small, though, for instance, if markets are disappointed with the trade headlines from Canada and oil prices correct lower due to perceived abatement in the Middle East turmoil.
Yesterday, ECB Governing Council member Joachim Nagel briefly mentioned the oil rally as a potential risk to price stability, and otherwise reiterated President Christine Lagarde’s narrative that the ECB is in a good position with rates. But it is indeed oil prices that are likely to have the biggest impact on rate expectations at the moment. Unless corrects further, markets may not really consider bringing the next cut forward to October.
The euro’s contribution to EUR/USD moves remains minimal, but today’s release of the in Germany can have some market impact. The “expectations” gauge is seen rebounding further to 35.0, but concerns about the EU-US trade standoff (albeit currently not the primary theme) could cap the upside.
We favour 1.15 rather than 1.16 as a near-term target and have a bearish bias on EUR/USD today. But the quite evident market preference to buy the dips in the pair means risks are still generally skewed to the upside.
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