- The FOMC meeting minutes released on Wednesday revealed a more hawkish tone.
- Trump said that negotiations with the US were at the final stages.
- This week, market participants will focus on the US core PCE report.
Currency futures rebounded amid an improving risk sentiment after Trump hinted at great progress in talks with Iran. Hopes for a peace deal weighed on the dollar and it lost some of its safe haven shine. Nevertheless, market participants remain cautious since the two countries could still fail to reach an agreement.
When the week began, traders were still digesting hotter-than-expected US inflation numbers. The dollar had benefitted greatly from the CPI and PPI reports and the subsequent increase in Fed rate cut expectations. Meanwhile most other major currencies fell.
Furthermore, the FOMC meeting minutes released on Wednesday revealed a more hawkish tone. Policymakers depressed their concerns about rising inflation. At the same time, they showed more willingness to tighten monetary policy which further supported the dollar.
Dollar collapse (Source: Bloomberg)
However, focus also shifted to the Iran war after Trump’s remarks on Wednesday. The US president said that negotiations with the US were at the final stages. He emphasized the same on Sunday and the news sent oil prices and the dollar tumbling. As a result inflation concerns eased slightly and the dollar pulled back. The Canadian dollar, a commodity currency, also suffered as it tracked the decline in oil. Meanwhile, riskier currencies like the pound and Aussie jumped.
“There are early signs that risk sentiment remains supported, early Sydney trade revealing a broad-based selloff in the USD, with ‘riskier’ currencies like the AUD benefitting as a result,” analysts from Westpac wrote in a research note.
However, market participants remain cautious after the numerous disappointments on proposals and talks between the US and Iran. Moreover, Trump said on Saturday that the blockade on Iranian ports would remain until a deal was reached and signed. Meanwhile, Iran remained silent.
Another disappointment is highly likely and it would mean continued supply disruptions. As the US summer driving season approaches, demand for oil will shoot up and send prices even higher. Therefore, the dollar could resume its rally. Meanwhile, a decline in risk appetite would weigh on most currencies apart from commodity currencies like the Candian dollar.
This week, market participants will focus on the US core PCE report that better measures inflation. Another upbeat report would support Fed rate hike expectations and boost the dollar.
