Forex Today: Peace in the Middle East hopes spur market sentiment higher

Joshua Gibson FXStreet

The US Dollar (USD) extended near-term bearish momentum, falling sharply and extending into a four-day decline as investors settle into a comfortable risk-on stance, stepping out of the safe-haven Greenback and into riskier assets as investors bank on a continued cooling of recent Middle East tensions.

Here's what to watch on Wednesday, June 25:

Despite a rocky start to the Trump-brokered ceasefire deal currently on the table, investors are banking on the phased walkback of missile-launching tensions between Israel and Iran to continue ahead. The US Dollar Index (DXY) is already knocking on multi-year lows, and poised to close near 97.70 for the first time in almost 40 months. The second day of Federal Reserve (Fed) Chair Jerome Powell’s testimony before congressional and Senate financial committees will commence on Wednesday, and markets can expect Fed Chair Powell to field a wide array of questions that are barely related to monetary policy.

EUR/USD tapped a 44-month peak on Tuesday, climbing above 1.1600 for the first time since October of 2021. Bolstered by a general weakening in the Greenback, the Euro is catching a broad-market bid, despite a fresh reminder that tariff tensions between the EU and the US may be on the backburner, but continuing to bubble away: European officials warned markets on Tuesday that they are preparing a response package of retaliatory measures if US President Donald Trump’s reciprocal tariffs, which were announced and then immediately suspended in April, were to be allowed to come back into effect in July.

GBP/USD is also enjoying a bullish cushion from Greenback weakness, knocking on multi-year peaks near 1.3650. A smattering of low-impact appearances from Bank of England (BoC) policymakers will leak across the newsfeeds on Wednesday, but nothing impactful or material is expected.

USD/CAD is set to rotate out of a near-term Loonie recovery on technical charts. Receding Crude Oil prices are kicking the legs out from beneath CAD bidders, pushing the Greenback-based USD/CAD chart back into the 1.3700 level after knocking on the high end of a descending technical channel.

AUD/USD has jumped back into its medium-term consolidation channel, cycling around the 0.6500 region like a prisoner pacing the shores of Saint Helen. Australian MoM Consumer Price Index (CPI) inflation figures for May will be releasing early Wednesday, but no major price shocks or meaningful changes in inflation levels are expected by median market forecasts.

XAU/USD has fallen back from recent highs, easing back below 3,350.00 as broad-market concerns over Middle East conflicts continue to ease. Demand for a safe-haven asset to dump pulled cash has evaporated, and Gold bidders can expect near-term price action in the yellow metal to continue bleeding down the charts.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Author

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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