Financial markets experienced heightened volatility and shifting sentiment amid renewed hopes for a US-Iran peace deal, with major currencies and risk assets responding to rapidly evolving headlines. US President Donald Trump announced on Thursday that a deal with Iran had been reached and could be signed soon, possibly over the weekend, but Iranian officials countered that no final decision had been made, with Foreign Ministry spokesperson Esmail Baghaei stating that a document is under review and 'closer to being approved than ever before' [1][2][6][7]. This uncertainty kept markets on edge, with risk appetite initially improving but later ebbing as investors awaited further clarity on the negotiations and the potential reopening of the Strait of Hormuz [2][6][7].
The US Dollar (USD) saw sharp swings in response to these developments. After Trump's initial threats of military action against Iran, the USD Index surged to its highest level since late March above 100.30, but reversed course and lost about 0.4% on the day after Trump called off strikes and signaled progress toward a deal [2]. By early Friday, the USD Index was flat around 99.70, while Wall Street's main indexes posted impressive gains [2]. Nomura analysts warned that the bullish consensus on the USD faces reversal risks, citing stretched positioning and historical patterns where strong US data surprises have often preceded USD weakness rather than strength [4].
The Australian Dollar (AUD) rebounded from an intraday low of 0.6979 to test resistance at 0.7055, with analysts at UOB suggesting a further test of 0.7060 is possible, though a sustained break above this level is unlikely in the near term [1][3]. The AUD's upside remains capped by persistent geopolitical uncertainties and diverging central bank expectations, as traders scale back bets on additional Reserve Bank of Australia (RBA) hikes while US inflation data has reaffirmed expectations for further Federal Reserve tightening [1].
The Euro (EUR) strengthened modestly against the USD, with EUR/USD moving back toward 1.1600 following the European Central Bank's (ECB) 0.25% rate hike—the first in nearly three years—and renewed optimism over a US-Iran deal [5][7]. The ECB left its rate path open, and MUFG analysts noted that the probability of another hike next month has fallen below 50:50, with the euro supported by hopes for a quick reopening of the Strait of Hormuz [5][7]. Final inflation data from Germany and France confirmed previous estimates, with German HICP up 2.7% YoY and French CPI up 2.8% YoY in May [7].
The Japanese Yen (JPY) gave up earlier gains, with USD/JPY returning above 160.00—a level seen as the limit of tolerable yen weakness by Japanese authorities [6][8]. Despite repeated warnings from Japanese officials and expectations for the Bank of Japan (BoJ) to hike rates to 1%, the yen remained under pressure, with UOB analysts expecting USD/JPY to remain range-bound between 159.40 and 160.70 in the near term [6][8]. BoJ Governor Kazuo Ueda's hospitalization is not expected to alter the bank's policy outlook [6].
Market participants are now focused on the upcoming release of the University of Michigan US Consumer Sentiment Index and further developments in the Middle East, which are expected to drive continued volatility across global financial markets [1][2].
CONCLUSION
Markets remain highly sensitive to headlines regarding the US-Iran peace deal, with risk assets rallying on optimism but volatility persisting amid conflicting signals from both sides. The US Dollar's recent strength faces downside risks, while the Euro and Australian Dollar have found support from central bank actions and improved sentiment. Further clarity on the US-Iran negotiations and key economic data releases will be crucial for near-term market direction.