USD Strengthens, EUR and GBP Weaken Ahead of US Data
The US dollar strengthened against all G-10 currencies on Tuesday (May 26), although movement remained within a narrow range, as investors assessed the impact of a US attack on an Iranian vessel amid talks to extend a ceasefire in the Middle East. The dollar's strength reflected market caution after a limited escalation, while also curbing the risk-on sentiment that had previously developed on hopes of progress in negotiations.
EUR/USD fell 0.2% but pared losses to trade slightly lower at 1.1639. On the policy front, ECB Executive Board member Isabel Schnabel said the ECB should still raise interest rates next month even if the Middle East conflict resolves quickly, while currency markets have almost fully priced in a June rate hike.
GBP/USD fell 0.2% to 1.3478. A European-based trader noted that spot volumes were in the 60%–65% range of the recent average, highlighting that liquidity conditions have not fully recovered after the US holiday and making FX movements more "tight."
The US attack came hours after President Donald Trump said negotiations with Tehran on an interim deal were "ongoing," while the 10-year US Treasury note pared earlier gains following the attack. The yield briefly fell as much as seven basis points to 4.4866% in a catch-up move following Monday's US public holiday, before stabilizing above 4.50%. This puts the dollar on two short-term supports: mild risk-off sentiment and yields climbing back from intraday lows.
USD/JPY rose 0.2% to 159.20, while one-week volatility fell to its lowest level since January 2022, suggesting the market sees the risk of very short-term surprises as easing despite the continued presence of geopolitical headlines. From Japan, Bank of Japan Deputy Governor Ryozo Himino emphasized the importance of maintaining market confidence in controlling inflation through appropriately adjusting the degree of monetary easing, maintaining focus on policy credibility amidst the yen's sensitivity to interest rate differentials.
Looking ahead, US markets will focus on a series of data such as the ADP, Philly Fed, and consumer confidence. This data is crucial because it will determine whether yields rise sustainably or soften, which in turn will shape the dollar's direction. Beyond the data, the market will also continue to monitor whether the latest escalation disrupts the ceasefire, given that the combination of geopolitics and energy inflation remains the primary channel driving policy expectations and dollar demand. (Arl)*
Source: Newsmaker.id
