The US Dollar Index (DXY) slumped to near 99.75 during the European trading session on Tuesday, falling 0.27% to around 99.73, as renewed hopes for a permanent peace deal between the United States and Iran reduced the Greenback's safe-haven appeal [1]. This sentiment was fueled by remarks from US President Donald Trump, who stated that negotiations with Tehran are in the 'final throes' and suggested the Strait of Hormuz could reopen within 'two or three days' if an agreement is reached, according to The Guardian [1]. The easing of geopolitical tensions, particularly the cessation of direct attacks between Israel and Iran, further weighed on the US Dollar and supported risk-sensitive currencies [3].
Against this backdrop, the British Pound (GBP) edged higher, with GBP/USD trading around 1.3390, up 0.42% on the day, mainly benefiting from the weaker US Dollar [3]. However, gains for the Pound were capped by ongoing UK political uncertainty, including several government resignations under Prime Minister Keir Starmer, and concerns about persistent inflation and weak economic growth [3]. While markets have reversed expectations from two Bank of England (BoE) rate cuts to now pricing in a 25-basis-point hike before year-end, analysts such as BBH and Société Générale caution that higher rates in a stagnating economy may not be bullish for the currency and expect the BoE to remain cautious [3].
The Australian Dollar (AUD) also saw mixed performance, trading up 0.15% against the US Dollar as risk sentiment improved, but underperforming other risk currencies amid expectations that the Reserve Bank of Australia (RBA) will cut rates rather than hike [2]. National Australia Bank (NAB) has abandoned its forecast for an August rate hike, now expecting a rate cut due to a loss of economic momentum, though no specific timing was provided [2]. Recent Australian data showed inflation cooling to 4.2% YoY in April from 4.6% in March, and a loss of 18.6K jobs in April versus an expected gain of 17.5K [2]. Commonwealth Bank of Australia (CBA) predicts the RBA will hold its Official Cash Rate at 4.35% through year-end, with cuts likely in May and August next year [2].
Looking ahead, investors are focused on upcoming US Consumer Price Index (CPI) data for May, expected to show a rise to 4.2% YoY from 3.8% in April, and UK GDP figures, both of which could influence monetary policy expectations for the Federal Reserve and the BoE [1][3]. According to the CME FedWatch tool, there is a nearly 69% chance of at least one Fed rate hike this year, a sharp reversal from earlier expectations of two cuts before the Middle East conflict [1].
CONCLUSION
The US Dollar's decline, driven by easing geopolitical tensions and Iran deal optimism, has buoyed major currencies like the British Pound and Australian Dollar. However, political uncertainty in the UK and shifting central bank expectations in both the UK and Australia are tempering gains. Upcoming inflation and GDP data remain key for future market direction.