Today’s Market Outlook
Middle East Tensions Escalate, but Safe-Haven Dollar Buying Fades as USD/JPY Remains Volatile in the Low 162s
■ Market Overview
Middle East tensions have intensified further at the start of the week.
The cycle of retaliation between the United States and Iran continues, with U.S. attacks now extending into a ninth consecutive day.
WTI crude oil surged from the low $82 area at the end of last week to briefly trade above $85 and is currently holding in the $84 range.
There is still no clear path toward de-escalation, leaving markets highly alert to further geopolitical developments.
Despite this, safe-haven demand for the U.S. dollar has failed to persist.
USD/JPY rose to around 162.59 in early Asian trading but was later pushed back toward the 162.30 area, indicating that dollar-buying momentum remains limited.
■ U.S. Dollar
The dollar continues to trade without a clear direction.
The Dollar Index rose to around 100.866 during the Asian morning session before falling toward 100.650 in early London trading.
It later recovered to around 100.77 and is now consolidating close to Friday’s New York closing level.
The dollar has reacted to fluctuations in crude oil, but overall price action remains confined within the previous session’s range.
In the past, rising Middle East tensions would normally have generated sustained safe-haven demand for the dollar.
This time, however, dollar buying has not continued in one direction.
The traditional relationship of:
Geopolitical crisis equals dollar strength
may therefore be weakening.
■ USD/JPY
USD/JPY remains volatile in the low 162s.
The pair initially climbed to around 162.59 in early Asian trading as geopolitical concerns increased, but buyers failed to maintain momentum, and the pair has since returned to the 162.30 area.
Selling pressure on the yen remains in place due to the wide U.S.–Japan interest-rate differential, continued demand for yen-funded carry trades, and concerns over Japan’s fiscal position.
At the same time, intervention risks remain elevated above 162.
As a result, downside support remains firm, but traders are also reluctant to chase the pair higher.
In the near term, USD/JPY is likely to remain volatile around the low 162s while reacting to Middle East headlines, crude oil prices, and developments in U.S. equities.
■ Middle East Developments
The Middle East has once again become the central market theme.
Retaliatory attacks between the United States and Iran continue, with U.S. military action now extending into a ninth consecutive day.
WTI crude oil briefly climbed above $85 as geopolitical risks became increasingly priced into the energy market.
At the same time, Iranian Foreign Ministry spokesperson Esmaeil Baghaei said that Iran had received proposals from intermediary countries regarding the conflict with the United States.
This suggests that although military tensions continue to rise, diplomatic channels have not been completely closed.
The key issues going forward will be:
Whether further attacks take place
Any developments involving the Strait of Hormuz or the Red Sea
Progress on ceasefire proposals from intermediary countries
■ Crude Oil
WTI crude oil has surged in response to the worsening situation in the Middle East.
Prices rose from the low $82 area at the end of last week to briefly trade above $85 and remain in the $84 range.
Higher oil prices increase concerns over renewed inflation and can influence both Treasury yields and equity markets.
Despite the rise in oil, however, the FX market has shown only limited demand for the dollar.
One possible explanation is that safe-haven dollar buying linked to geopolitical risk is being offset by selling pressure caused by declining confidence in the United States itself.
If crude oil extends its rally, inflation concerns could eventually strengthen the dollar again.
For now, however, the currency market’s response remains muted.
■ Risks Surrounding the United States
The current market is not only focused on Middle East risks.
A possible decline in confidence toward the United States may also be limiting demand for the dollar.
U.S. equities have come under pressure as investors reduce exposure to AI-related stocks.
Lower-cost Chinese AI technology is beginning to challenge the dominant position of U.S. companies, increasing uncertainty over America’s technological advantage.
Reports that President Trump was booed at a World Cup venue have also been interpreted by some investors as a symbolic sign of weakening political support.
Even when geopolitical risks rise, the dollar may struggle to rally if concerns over U.S. technological leadership and political stability are increasing at the same time.
The current market appears to be balancing Middle East risk against U.S.-specific risk, resulting in a relatively subdued dollar reaction.
■ Equity Markets
The performance of U.S. equities will also be important for the dollar.
The main focus is whether AI-related stocks can stage a technical rebound.
These shares had previously driven the U.S. equity rally, but the recent correction has weakened overall market sentiment.
A recovery in AI stocks could help restore some confidence in U.S. markets and improve broader risk appetite.
On the other hand, if the correction continues, concerns over the wider U.S. equity market could intensify and may also affect confidence in the dollar.
Domino’s Pizza is among the companies scheduled to report earnings today.
However, investors are likely to focus more on the performance of AI-related shares than on individual corporate results.
■ Today’s Key Economic Data
The economic calendar is relatively light at the start of the week.
The main releases are:
Canada Consumer Price Index
U.S. Leading Economic Index
Canadian CPI is expected to fall 0.2% month-on-month while increasing 2.9% year-on-year, indicating a possible moderation in inflation.
The U.S. Leading Economic Index is forecast to decline by 0.1%, compared with a previous increase of 0.1%.
Neither release is expected to significantly change the broader direction of global markets.
However, Canadian CPI could have a noticeable impact on the Canadian dollar.
■ Central Bank Events
There are few scheduled comments from central bank officials.
The ECB is in its blackout period until July 23, while the Federal Reserve remains in blackout until July 30.
As a result, new monetary policy guidance is unlikely.
Today’s FX market is therefore expected to be driven primarily by:
Middle East developments
Crude oil prices
U.S. equity-market performance
■ Key Focus for London and New York
The main points to watch are:
- Whether USD/JPY can hold in the low 162s
- Additional Middle East headlines
- Whether WTI crude retests the $85 area
- Whether safe-haven dollar buying returns
- Whether U.S. AI-related stocks can rebound
- Whether the Dollar Index breaks below 100.65
- Whether diplomatic proposals involving Iran make progress
The most important question is whether demand for the dollar strengthens again.
If Middle East tensions continue to worsen but the dollar still fails to rally, markets may be placing greater emphasis on risks surrounding the United States itself.
■ Bottom Line
Middle East tensions have intensified further at the start of the week.
The cycle of retaliation between the United States and Iran continues, while WTI crude oil has briefly risen above $85.
Despite this, safe-haven demand for the dollar has not persisted.
USD/JPY rose to around 162.59 before falling back toward the 162.30 area, while the Dollar Index remains close to Friday’s closing level.
Uncertainty surrounding U.S. technological leadership and political stability may be offsetting the dollar-positive impact of geopolitical risk.
With few major economic releases or central-bank events scheduled today, markets are likely to remain highly sensitive to Middle East headlines, crude oil prices, and movements in U.S. equities.
USD/JPY is expected to remain volatile in the low 162s.
The key question for the overseas session is whether safe-haven dollar demand returns or whether the market begins to move more clearly toward renewed dollar weakness.
