The US Dollar strengthened significantly on Wednesday, driven by stronger-than-expected US economic data and escalating geopolitical tensions in the Middle East, impacting major currency pairs including USD/JPY, EUR/USD, and GBP/USD [1][2][3]. The ISM Services PMI for May rose to 54.5 from 53.6 in April, surpassing market expectations and indicating robust growth in the US services sector [1][2][3]. Additionally, the ADP private payrolls increased by 122K in May, up from 105K in April and exceeding forecasts of 117K, marking the highest reading since January 2025 according to [2][3]. The US Dollar Index (DXY) climbed, trading around 99.45–99.50, up 0.19% to 0.25% on the day and near recent highs [2][3].
The USD/JPY pair traded just below the 160.00 level, with the Yen struggling to attract demand despite a hawkish tone from Bank of Japan Governor Kazuo Ueda, who stated the BoJ would carefully consider rate hikes if inflation risks intensify and reiterated the possibility of further rate increases if underlying inflation aligns with projections [1]. The last BoJ intervention occurred on April 30, when the Yen dropped from an intraday high of 160.72 to a low of 155.55 [1]. Technical analysis showed USD/JPY maintaining a bullish bias, with immediate resistance at 160.00 and support levels at 159.89, 159.81, and 159.70 [1].
EUR/USD extended its decline, trading around 1.1607, as the Euro weakened against the US Dollar [2]. The upbeat US data reinforced expectations that the Federal Reserve would keep interest rates unchanged in the near term, with traders seeing a 40% chance of a 25 basis point rate hike at the December meeting, according to CME FedWatch data [2]. New York Fed President John Williams stated there was no obvious argument to change rates currently but warned of increased upside inflation risks [2]. Meanwhile, Eurozone inflation rose to 3.2% in May, the highest since September 2023, and core inflation accelerated to 2.5%. A Reuters survey indicated that 74 of 80 economists expect the ECB to raise the deposit rate to 2.25% at its June meeting [2].
The British Pound fell by 0.28% against the US Dollar, with GBP/USD trading at 1.3426, as geopolitical tensions escalated following US and Iranian military actions near the Strait of Hormuz [3]. Oil prices surged over 2% and the DXY reached three-day highs [3]. The US JOLTS job openings report showed increased vacancies in April, and the combination of labor market strength and business activity expansion could lead to a solid Nonfarm Payrolls report, with expectations for an 85K increase in employment [3]. The ISM Services PMI's Prices Paid sub-index rose from 70.7 to 71.3, indicating that energy price shocks are broadening into the services sector [3]. In the UK, the S&P Global Services PMI contracted to 49.3 in May from 52.7 in April, though it remained above forecasts of 47.9 [3]. Money markets have reduced expectations for a Bank of England rate hike this year, with a quarter-point hike priced in by September [3].
Analysts noted that the combination of strong US data and geopolitical risks is supporting the US Dollar, while higher energy prices and persistent inflation risks could influence future central bank decisions in the US, Eurozone, and UK [1][2][3].
CONCLUSION
Stronger-than-expected US economic data and heightened Middle East tensions have driven the US Dollar higher against major currencies, with the Yen, Euro, and Pound all weakening. Market participants are now focused on central bank responses to inflation and energy shocks, with expectations for cautious monetary policy in the US and potential rate hikes in the Eurozone. The overall market sentiment remains risk-averse, favoring the US Dollar amid ongoing uncertainty.