Middle East tensions lessen as the dollar stays flat ahead of a significant inflation report.

 

Amidst a deflation of Middle East tensions and prior to the release of the Federal Reserve's preferred inflation gauge later this week, the value of the US dollar remained relatively stable in quiet trading on Monday.

The Dollar Index, which measures the US dollar against a basket of six other currencies, was steady at 106.005 at 05:40 ET (09:40 GMT) this morning. It has since dropped from last week's five-month high of 106.51.

                           Dollar steady before a significant release of inflation

 
After Israel escalated the tension in the unstable Middle East last week by attacking Iran with missiles, the dollar shot to all-time highs.

"As the week begins, sentiment is generally supported across asset classes," ING analysts wrote in a note. "It seems that everyone involved has opted to minimise the extent and ramifications of Israel's Friday strikes in Iran.”

Nevertheless, a number of hawkish remarks from Fed members, together with solid U.S. economic data and ongoing inflation, have also helped to boost the dollar and lessen the likelihood that rates will be cut by the Fed anytime soon.

In an apparent attempt to prevent a regional conflict, Tehran downplayed Israel's retaliatory drone strike against Iran, although tensions now seem to have subsided. 

In anticipation of the policy-setting meeting the following week, these officials will be silent this week. However, there won't be much going on before Friday's analysis of the PPI, the Federal Reserve's preferred inflation indicator, which analysts predict will stay high in March.

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An first estimate of the GDP for the first quarter, which is anticipated to have slowed marginally from the previous quarter, is among the other economic data for the week. Along with updated data on consumer mood and inflation forecasts, there will also be information on new home sales and first unemployment claims.

According to Francois Villeroy de Galhau, the head of the French central bank, increased tensions in the Middle East are not anticipated to raise energy costs and shouldn't have an impact on the European Central Bank's intentions to begin reducing interest rates in June.
In Europe, EUR/USD rose 0.1% to 1.0656, trading near six-month lows with regional economic weakness set to result in the European Central Bank cutting interest rates before the Federal Reserve.
Elevated tensions in the Middle East are unlikely to drive up energy prices and should not affect the European Central Bank's plans to start cutting interest rates in June, French central bank chief Francois Villeroy de Galhau said on Sunday.

In Europe, EUR/USD rose 0.1% to 1.0656, trading near six-month lows with regional economic weakness set to result in the European Central Bank cutting interest rates before the Federal Reserve.
Elevated tensions in the Middle East are unlikely to drive up energy prices and should not affect the European Central Bank's plans to start cutting interest rates in June, French central bank chief Francois Villeroy de Galhau said on Sunday.
In an interview with business daily Les Echos, Villeroy stated, "Barring surprises, there is no need to wait much longer". "A significant increase in oil prices is not now being caused by the fighting. If this were ever the case, we would need to examine monetary policy in order to determine whether the shock is transitory and restricted or if it spreads to underlying inflation beyond commodities.

In response to last week's implied slowdown in British inflation from Bank of England Governor Andrew Bailey and Deputy Governor Dave Ramsden, the GBP/USD pair saw a 0.1% decline to 1.2355, barely above its lowest point since mid-November observed on Friday.

After Israel escalated the tension in the unstable Middle East last week by attacking Iran with missiles, the dollar shot to all-time highs.

In an apparent attempt to prevent a regional conflict, Tehran downplayed Israel's retaliatory drone strike against Iran, although tensions now seem to have subsided.

"As the week begins, sentiment is generally supported across asset classes," ING analysts wrote in a note. "It seems that everyone involved has opted to minimise the extent and ramifications of Israel's Friday strikes in Iran.”

Nevertheless, a number of hawkish remarks from Fed members, together with solid U.S. economic data and ongoing inflation, have also helped to boost the dollar and lessen the likelihood that rates will be cut by the Fed anytime soon.

In anticipation of the policy-setting meeting the following week, these officials will be silent this week. However, there won't be much going on before Friday's analysis of the PPI, the Federal Reserve's preferred inflation indicator, which analysts predict will stay high in March.

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This week's other economic data includes a first estimate of GDP for the first quarter, which is predicted to have decreased little from the previous quarter. Along with updated statistics on consumer mood and inflation expectations, data on new house sales and initial unemployment claims will also be made public.

Even though the euro is rising, the ECB will likely cut rates soon.
With regional economic weakness expected to lead to an interest rate drop by the European Central Bank ahead of the Federal Reserve, the EUR/USD rose 0.1% to 1.0656 in Europe, trading close to six-month lows.

According to Francois Villeroy de Galhau, the head of the French central bank, increased tensions in the Middle East are not anticipated to raise energy costs and shouldn't have an impact on the European Central Bank's intentions to begin reducing interest rates in June.

"Unless there are any surprises, there shouldn't be much more waiting," Villeroy stated in an interview with business daily Les Echos. "As of this now, there's no discernible increase in oil prices due to the violence. If this were ever the case, we would need to examine monetary policy in order to determine whether the shock is brief and contained or if it spreads to underlying inflation that goes beyond commodities.

In response to last week's implied slowdown in British inflation from Bank of England Governor Andrew Bailey and Deputy Governor Dave Ramsden, the GBP/USD pair saw a 0.1% decline to 1.2355, barely above its lowest point since mid-November observed on Friday.

"The Bank of England's deputy governor, Dave Ramsden, sounded less concerned about price pressures and suggested that there were indications of UK inflation converging to that of the eurozone," ING reported. This caused sterling markets to move on Friday. Crucially, he continued, the Bank will be "responsive" as further proof of inflation comes in.

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Weak yen ahead of the BOJ meeting
Amid concerns about possible government intervention, investors were on high alert as the USD/JPY moved 0.1% higher at 154.74 in Asia, staying far above the 154 mark and close to 34-year highs.

This week, attention will be on the Bank of Japan's rate decision on Friday. This will be the central bank's first meeting following the historic rate hike in March. We'll be watching attentively for any indications of upcoming rate increases and policy adjustments.

As anticipated, the People's Bank of China maintained its benchmark lending prime rate, which caused the USD/CNY exchange rate to rise by 0.1% to 7.2437.

In an effort to support economic growth, the PBOC maintained record low levels of the LPR while maintaining a loose monetary policy. Low interest rates, nevertheless, are also anticipated to maintain the pressure on the yuan.

The USDCNY pair was trading above the psychologically significant 7.2 mark, nearing a five-month high.