United States
Israel's recent attack on an Iranian nuclear enrichment facility, allegedly targeting scientists and key Revolutionary Guard leadership figures, has reportedly not led to an increase in radioactivity. The United States has clarified that while it was informed of the attack, it did not authorize it. This comes on the heels of President Trump's warnings about a possible strike. Despite this development, the U.S. dollar has shown strength against G10 currencies and most emerging market currencies, yet the gains have been relatively modest, reigniting debates about its status as a safe haven. Meanwhile, U.S. equities have taken a downturn, mirroring a similar decline across European markets, although Asia Pacific markets experienced less significant decreases. U.S. bond markets haven't seen notable gains, with the 10-year Treasury yield dropping marginally to about 4.35%. Gold prices are up by over 1%, valued at approximately $3,386. The Dollar Index has bounced back from a new three-year low seen in North American turnover but remains cautious of breaching the previous day's highs, fueling discussions about its safe haven status. Upcoming data includes the preliminary University of Michigan's consumer sentiment, which is expected to show slight improvements in confidence and downward adjustments in inflation expectations.
Eurozone
The euro recently reached a high of about $1.1630, a level not seen since October 2021. Despite Israel's strike on Iran, which brought the euro down to approximately $1.1510, it remained above recent lows. Eurozone industrial output demonstrated a steep decline in April (-2.4%), while the trade surplus halved from a record 29 billion euros in March to 14 billion euros. These figures align with a tempered growth trajectory following a robust 0.6% quarter-over-quarter expansion in Q1 2025. Growth forecasts are less optimistic, with predictions of just 0.1% growth in both Q2 and Q3 2025. The swaps market indicates over a 10% probability of a rate cut next month, escalating to nearly 60% for September, 75% for October, and almost entirely discounted by year-end.
United Kingdom
Sterling reached a three-year high of around $1.3625 recently, achieved despite weak employment data and an unexpectedly large GDP contraction in April. This has bolstered expectations of a potential rate cut in August. Sterling managed a slight increase above $1.3630 before falling back slightly. Meanwhile, compared to the euro, sterling has weakened, with the euro climbing to around GBP0.8550, which represents a 50% retracement of the euro's losses from mid-April. The market is seeing a consolidation phase.
China
The broader weakness of the U.S. dollar threatened the yuan's period of consolidation. Having traded briefly above CNH7.20, the dollar retreated toward CNH7.1715, before rallying to nearly CNH7.19. The People's Bank of China (PBOC) set the dollar's reference rate lower for four consecutive sessions, dropping below CNY7.18 for the first time since early April. China's May lending figures aligned with forecasts, but the economy continues to struggle for momentum as further data is anticipated early next week.
Japan
The dollar's upward trajectory was reversed, having been near a monthly high of JPY145.45, only to fall to JPY142.80 following Israel's strike. It rebounded to almost JPY144. Despite being temporarily decoupled from the U.S. 10-year yield, the correlation is rebounding above 0.40, a two-month high. Japan recently adjusted its Q1 contraction figures from 0.7% to -0.2%, though the struggling start to Q2 remains evident. Japan's industrial output was revised down, and a modest gain in the services sector was noted. While the Bank of Japan is slow to raise rates amid stable inflation, bond purchase adjustments could be on the horizon.
Canada
After rebounding from a drop earlier in the week, the Canadian dollar experienced fluctuations due to Israel's attack. It showed a recovery to levels around CAD1.3650. Canada is due to release various economic indicators, although they traditionally draw little market attention. The swaps market indicates a slight chance of a rate cut by year-end, marking the end of the current easing cycle.
Australia
The Australian dollar saw recovery from an eight-day low to settle around $0.6535 before the geopolitical situation moved it to nearly $0.6455. It has since rallied to almost $0.6500, consolidating within this range.
Mexico
The Mexican peso, a 24-hour traded currency, experienced volatility in light of recent global events. The dollar spiked against the peso to MXN19.08 but stabilized around MXN19.00. Despite Mexico's above-target inflation of over 4%, the central bank faces internal debate over future rate cuts. A potential compromise is now suggested, with the swaps market pricing in a modest 25 basis point cut ahead of the upcoming monetary policy meeting.
