- Last week, the US dollar plunged as it lost some of its safe-haven appeal.
- US inflation rose to 3.3% annually from 2.4% previously.
- Talks between the US and Iran failed.
Currency futures ended strongly on Friday after an optimistic week with the US and Iran striking a ceasefire deal. However, there was panic on Sunday after talks between the two countries failed. Still, optimism from the previous week returned on Monday as market participants watched for further developments.
Last week, the US dollar plunged as it lost some of its safe-haven appeal. The US-Iran ceasefire deal this week eased concerns about an oil-driven spike in global inflation. The month-long war had caused a significant surge in oil prices. Higher oil prices affect the prices of most goods and would therefore mean hotter global inflation.
As a result, market participants were already pricing rate hikes from several major central banks, including the ECB and the BoE, to counter the effects of higher prices on their economies. Moreover, FOMC minutes released this week indicated that some officials were leaning toward rate hikes to cool the economy.
The ongoing geopolitical tensions have hurt risk appetite, sending most investors to the safe-haven dollar. However, this changed briefly after the ceasefire deal. Risk appetite surged, and currencies like the pound and the euro recovered. The yen has suffered significantly because Japan depends heavily on imported oil. Therefore, the ceasefire deal was a great relief for traders.
US CPI (Source: Statista)
Furthermore, market participants focused on crucial US data, showing cooler-than-expected inflation numbers. Prices grew by 3.3% annually from a previous reading of 2.4%. However, economists had forecasted a 3.4% increase. The downbeat figure further eased inflation worries.
Additionally, the US economy expanded by 0.5%, missing the forecast of 0.7%. Downward pressure on the dollar boosted currency futures.
However, sentiment shifted on Sunday after reports that talks between the US and Iran had failed. Trump promised to blockade the Strait of Hormuz, rekindling global inflation worries.
“Effective immediately, the United States Navy, the finest in the world, will begin the process of BLOCKADING any and all ships trying to enter, or leave, the Strait of Hormuz,” Trump said in a post to his social media platform Truth Social. “The blockade will begin shortly. Other countries will be involved with this blockade.” The new twist has renewed concerns that the war will continue and oil prices will keep climbing. That would mean continued dollar strength.
