Dollar Rises On Middle East Tension, Higher Fed Hike Odds

The US dollar strengthened as traders priced in 43 basis points of additional Federal Reserve tightening by year-end and assigned a 33% chance of a July rate increase. Attention shifted to the European Central Bank decision due later today. US-Iran tensions and Houthi disruptions in the Bab el-Mandeb strait and the Red Sea weighed on risk sentiment alongside higher oil prices.

The greenback has recovered in recent days after last week’s softer US inflation data briefly eased rate expectations. Market pricing moved from about 32 basis points a week ago to 43 basis points now, reflecting a firmer outlook for policy.

In the euro area, the ECB is expected to keep rates unchanged and continue a data-dependent, meeting-by-meeting approach. The central bank is not scheduled to release new macroeconomic projections at this meeting, focusing attention on President Christine Lagarde’s press conference for guidance on the outlook into September. Market prices imply about 47 basis points of further ECB tightening by year-end and roughly a 73% probability of a September increase.

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In spot trading, EUR/USD hovered near a technical breakout area after rebounding from support around 1.14 while remaining capped by a descending trendline on daily charts. A push above that line would bring 1.16 into view, while a drop through support would point to the 1.13 area.

On the data calendar, the ECB policy decision and weekly US jobless claims are due today, followed on Friday by flash purchasing managers’ indexes for the eurozone and the United States. Developments around the US-Iran standoff remain a key driver for risk appetite and the near-term dollar path.

As previously reported, Eurozone banks tightened lending standards in the second quarter, pointing to higher perceived credit risk and weaker risk tolerance as the main drivers.