- The US Dollar Index (DXY) remained steady at 99.13 today, as conflicting signals emerged from the draft agreement to end the Middle East geopolitical conflict, causing prices to fluctuate widely after reaching a six-week high.
- The Purchasing Managers' Index (PMI) for the Eurozone and the UK in May contracted more than expected, highlighting the deep pressure of high energy costs on the fundamentals of overseas economies.
- A Bank of Japan (BOJ) board member hinted at a normalization of interest rate hikes, with the yen finding support against the dollar around 158.92, as the market remains highly vigilant of the 160 intervention threshold.
Geopolitical Signals Trigger High-Frequency Forex Rebalancing
On Thursday, algorithmic trading and liquidity in the forex market were highly focused on the diplomatic dynamics between Washington and Tehran. A Reuters report previously indicated that Iran's Supreme Leader ordered enriched uranium to remain within the country, which temporarily triggered safe-haven buying, pushing the US Dollar Index to a six-week high. Subsequently, the dollar quickly gave back all its earlier gains due to unverified reports circulating about both sides reaching a final draft agreement to end the war. US President Trump later stated that the US would eventually reclaim Iran's high-enriched uranium stockpile. This series of geopolitical uncertainties caused safe-haven funds to frequently switch directions during the session. If Middle East geopolitical tensions cannot substantially cool down in the short term, the geopolitical premium in the forex market will be difficult to fully dissipate.
Weak Macro PMI Intensifies Non-US Currency Valuation Adjustments
Apart from geopolitical factors, weak macro high-frequency data from major non-US economies has become another core driver of forex market trends. Data released in May showed that due to geopolitical conflicts driving up living costs and accelerating corporate layoffs, the contraction in Eurozone economic activity reached its largest extent in over two and a half years, putting pressure on the euro against the dollar (EUR/USD) to 1.1624. Meanwhile, UK businesses are experiencing the most widespread business contraction in over a year, with the pound against the dollar (GBP/USD) closing at 1.3441. Noah Buffam, Director of Fixed Income, Forex, and Commodities Strategy at CIBC Capital Markets in Toronto, noted that the oil shock has persisted for nearly three months, with signs of deteriorating global economic growth gradually emerging, prompting the market to maintain a cautious stance on growth-sensitive currencies.
Divergent Central Bank Policies Support the Defensive Nature of the Dollar
Compared to the economic slowdown in Europe and Japan, the latest US initial jobless claims data showed a decline, indicating resilience in its labor market, providing the Federal Reserve with policy maneuvering space to address potential inflation rebounds. Andrew Kenningham, Chief European Economist at Capital Economics, stated that there are currently no signs prompting the European Central Bank (ECB) Governing Council to change its plan to raise interest rates by 25 basis points in June. In the Asian market, the dollar traded against the yen (USD/JPY) at 158.92, approaching the critical 160 level that triggered official forex intervention last month. BOJ board member Junko Koeda stated that given the core inflation rate approaching the 2% target, the central bank needs to continue raising interest rates. However, if the US-Japan interest rate differential does not visibly narrow, the yen exchange rate will still face a technical test near the 160 level.
