The announcement of a ceasefire agreement between Israel and Lebanon, following US-led negotiations in Washington, has eased concerns about a broader conflict in the Middle East and reduced risk aversion in currency markets [1][2]. The ceasefire requires a 'complete cessation' of fire by Iran-backed Hezbollah and includes the establishment of 'pilot security zones' controlled exclusively by Lebanese armed forces [2]. This development has led to a bounce in the EUR/USD pair, which reversed part of its previous day's slide to a weekly low, as the safe-haven US Dollar (USD) lost some strength during the Asian session on Thursday [1].
Despite the positive impact of the ceasefire, uncertainty persists due to the lack of progress in US-Iran peace negotiations and renewed hostilities in the Gulf. The US military reported repelling multiple Iranian missiles and drones launched at Kuwait and Bahrain, and conducting self-defense strikes on Qeshm Island in response [1]. Iranian armed forces targeted US military bases in Bahrain in retaliation, keeping geopolitical risks elevated and supporting crude oil prices, which have preserved weekly gains and revived inflationary concerns [1].
Market participants are closely watching central bank policy responses. Rising bets for a 25 basis point interest rate hike by the European Central Bank (ECB) later this month are supporting the euro, while traders assign a 50% chance that the US Federal Reserve (Fed) will hike interest rates by the end of the year, according to CME Group's FedWatch Tool [1]. The outlook for the USD remains cautious, with traders awaiting the US Nonfarm Payrolls (NFP) report for further cues on Fed policy [1].
The Japanese Yen (JPY) gained as the USD/JPY pair halted its four-day winning streak, trading around 159.90 during Asian hours on Thursday, reflecting the USD's weakness amid easing risk aversion [2]. SMBC Nikko strategist Makoto Noji warned of a potential 'historic Yen collapse' driven by prolonged oil price volatility and loose fiscal policy, urging a coordinated strategy of interest rate hikes, fiscal restraint, and market interventions [2]. Finance Minister Satsuki Katayama emphasized Japan's readiness for 'appropriate action' in response to persistent energy market volatility, framing interventions as broader economic management and highlighting close coordination with the United States [2].
US Dollar price movements show the USD was strongest against the Australian Dollar, while it weakened against the Euro (-0.08%), British Pound (-0.05%), Japanese Yen (-0.11%), Canadian Dollar (-0.01%), New Zealand Dollar (-0.06%), and Swiss Franc (-0.11%) [1].
CONCLUSION
The Israel-Lebanon ceasefire has reduced risk aversion, weakening the US Dollar and supporting gains in the Euro and Japanese Yen. However, ongoing geopolitical tensions and energy market volatility continue to influence central bank policy expectations and currency movements. Market participants remain cautious, awaiting further data and policy signals to determine the next direction.