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The dollar gained significant traction on the euro and pound on Tuesday, climbing 0.48% on the former and nearly double that on the latter. However, with the war between Iran and Israel growing and oil prices climbing, the dollar’s gains are likely more to do with its role as a safe haven currency than a sign of economic strength in the US.
This morning brought news that UK inflation fell to 3.4% in May, in line with forecasts. Though the price of food is still climbing. The main drive of the fall was reduced transport costs, so any improvement there may be wiped out by increased oil prices. The growing conflict in the Middle East has already pushed up the cost of petrol in the UK by 0.2p per litre, and analysts say it could rise another 5p in the coming months.
The uncertainty of what is happening in the Middle East and the unpredictability of its impact on the UK economy, especially with US president Donald Trump’s on-again, off-again tariff policy, makes it look more likely that the Monetary Policy Committee will vote against cutting the Bank of England’s interest rate tomorrow.
Retail sales in the US are markedly down. The 1% drop in May is much worse than analysts forecast, and a sign that Trump’s tariff policy may be hitting the US economy hard. Despite this, the dollar grew significantly.
On Monday, with word of a possible ceasefire being brokered between Iran and Israel, oil prices dipped and the stock market soared. On Tuesday, however, as Trump denied any such talk and, instead, called for Iran’s unconditional surrender, stocks were down, the price of oil climbed to a four-month high and the dollar grew in value. This all indicates that the USD’s status as a safe haven currency is holding, despite its instability in recent months.
This afternoon the Federal Reserve Bank will announce its interest rate decision. Trump has put enormous pressure on chair Jerome Powell to cut rates, asking for as much as 1% off, but it seems unlikely any cut will come. It is unclear how Trump will respond to a rate hold.
Meanwhile, in Europe, a survey from Germany revealed a huge swelling of positive economic sentiment for the second month in a row. With a strengthening euro, inflation in line with targets and this month’s interest rate cut, German’s anticipate large economic growth.
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GBP: Inflation down ahead of Bank cut decision
The pound fell nearly 0.9% against the dollar on Tuesday, almost 1p per dollar, as the markets responded to the growing conflict in the Middle East. This morning brought the news of lower inflation but those gains may be wiped out by increased oil prices.
GBP/USD past year
EUR: Soaring economic outlook
The euro was more than 0.3% ahead of the pound on Tuesday but fell over 0.5% against the dollar. However, economic sentiment in Germany is swelling, suggesting the country is predicting large growth in 2025.
EUR/USD past year
USD: Iran/Israel conflict drives dollar growth
The dollar gained more than 0.5% on the euro and nearly double that on the pound on Tuesday. This is due to the worsening conflict in the Middle East grows, more than signs of a strong economy coming from the US. Today the Fed will announce its interest rate decision, potentially upsetting the markets further.
USD/GBP past year
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