Forex Today: US Dollar and Oil continue to rise as tensions in Middle East escalate further
Here is what you need to know on Wednesday, July 22:
Markets remain on edge midweek as tensions in the Middle East escalate further, with the United States (US) and Iran continuing to exchange strikes. The economic calendar will not offer any high-impact data releases on Wednesday, allowing investors to stay focused on headlines surrounding geopolitics.
The US Dollar (USD) Index registered gains for the fourth consecutive trading day on Tuesday and reached its highest level in over a week above 101.20. Early Wednesday, the USD Index stays in a consolidation phase above 101.00.
Heightened tensions threaten carry trades as Oil shock risk builds
Analysts at OCBC say their “base case has been for a managed escalation in the Middle East, allowing low market volatility to persist, supporting FX carry trades and limiting further USD gains ahead of next week’s FOMC meeting.” However, they caution that “the risk of a broader conflict has risen following the deaths of three US soldiers in Iran-linked attacks,” shifting the balance of risks around energy markets and the Dollar.
OCBC warns that “a larger escalation could revive fears of a prolonged supply shock and drive oil prices back above USD100/bbl.” They note that, “for perspective, Brent crude reached USD126/bbl in late April, around 40% above current levels,” underscoring the potential scale of any renewed spike.
In such a scenario, the bank argues that “such an outcome would likely trigger higher market volatility, erode the appeal of FX carry trades, and support a renewed USD rally,” as investors reassess both geopolitical risk and the implications of higher Oil prices for the policy outlook.
US Dollar Price This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Canadian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.16% | 0.56% | 0.49% | 0.60% | -0.42% | 0.28% | 0.51% | |
| EUR | -0.16% | 0.41% | 0.26% | 0.44% | -0.58% | 0.11% | 0.34% | |
| GBP | -0.56% | -0.41% | -0.15% | 0.03% | -0.98% | -0.29% | -0.02% | |
| JPY | -0.49% | -0.26% | 0.15% | 0.21% | -0.85% | -0.25% | 0.13% | |
| CAD | -0.60% | -0.44% | -0.03% | -0.21% | -0.98% | -0.46% | -0.06% | |
| AUD | 0.42% | 0.58% | 0.98% | 0.85% | 0.98% | 0.70% | 0.96% | |
| NZD | -0.28% | -0.11% | 0.29% | 0.25% | 0.46% | -0.70% | 0.27% | |
| CHF | -0.51% | -0.34% | 0.02% | -0.13% | 0.06% | -0.96% | -0.27% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
Crude Oil prices push higher early Tuesday, with the barrel of West Texas Intermediate trading at its higher level in over a month near $86, rising more than 1.5% on the day. The US military announced late Tuesday that it conducted more strikes on Iranian “military targets.” In the meantime, US Secretary of State Marco Rubio said that Iran is “not serious about talks” and argued that allowing Iran to control the Strait of Hormuz would create a "dangerous precedent."
Meanwhile, two tankers carrying Saudi Oil turned back after Houthi threats in the Red Sea, and US President Donald Trump said they could soon target the area of Pickaxe Mountain, where Iran is believed to have an underground facility for its nuclear programme.
Middle East risks keep Brent elevated as Hormuz and Saudi routes face disruption
Analysts at Rabobank warn that Middle East supply routes remain highly fragile, with “Hormuz remains on a knife-edge, with most flows halted save those taking the Iranian route.” They add that the situation has deteriorated further after “two tankers carrying Saudi crude made U-turns in the Red Sea after a Houthi warning,” describing this as “the first sign of the threatened blockade of Saudi ports.” Against that backdrop, Rabobank argues that the developing disruption “will not allow energy markets to ‘take the summer off’ rather than taking off.”
The UK's Office for National Statistics reported on Wednesday that annual inflation, as measured by the change in the Consumer Price Index (CPI), softened to 2.6% in June from 2.8% in July. This reading came in below the market expectation of 2.7%. The core CPI, which excludes volatile energy and food prices, rose 2.6% in this period, matching May's reading. Following a four-day decline, GBP/USD holds steady after inflation data and trades in a narrow range below 1.3400.
AUD/USD extends its sideways grind near 0.7000 after closing virtually unchanged on Tuesday. In the early Asian session on Thursday, June employment data from Australia will be watched closely by market participants.
Gold (XAU/USD) gathered bullish momentum and rose more than 1.5% on Tuesday. XAU/USD continues to stretch higher early Wednesday and trades at its highest level in nearly two weeks above $4,100.
EUR/USD corrects higher and clings to small gains above 1.1400 in the European session on Wednesday.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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