DXY testing year lows
Geopolitical tensions continue to ease, with markets responding positively to the Israeli Iranian truce, which has remained in place since early yesterday. U.S. equity markets advanced yesterday, with the S&P 500 closing just 1% below its all-time high. On the monetary policy front, Fed Chair Jerome Powell maintained a cautious stance, reiterating the central bank’s wait-and-see approach. Still, he noted that if not for anticipated inflationary pressures driven by tariffs, the Fed likely would have continued cutting rates.
In currency markets, the U.S. Dollar Index (DXY) has lost momentum, slipping once again below the 20-day moving average. Meanwhile, the Canadian dollar remains steady, trading within a narrow band between 1.371 and 1.374.
Greenback on the back foot
Antonio Ruggiero – FX & Macro Strategist
The de-escalation of the Israel-Iran conflict reignited underlying bearish sentiment toward the dollar, which dropped almost 1.5% from Monday’s highs of 99.385. The decline was further driven by Powell’s testimony to Congress. While he maintained the Fed’s wait-and-see stance pending greater clarity on the impact of Trump’s tariffs, his tone turned distinctly dovish. “The story has been evolving, our thinking has been adapting,” he remarked, noting that a significant majority of Fed officials see rate cuts as appropriate later this year—and that softer inflation data could accelerate the timeline.
Adding to the dollar’s slide was disappointing Conference Board data: expectations slipped to 69 from 72.8, the present situation index dropped to 129.1 from 135.9, and the overall index fell to 93.0 from 98—all released during Powell’s remarks.
Canada’s inflation holds steady, core pressures still elevated
On the macro side, Inflation held steady at 1.7% year-over-year in May, matching expectations. Meanwhile, the Bank of Canada’s preferred core inflation measures edged down to 3.0% from 3.1% in April, still right at the upper limit of the Bank’s 1–3% target range. Core inflation has remained at or above 3% for seven of the past eight months, pointing to persistent underlying price pressures
Shelter costs, while still the main driver of inflation, showed some signs of easing. Annual shelter price growth slowed to 3.0% in May from 3.4% the month before. This came as rent inflation cooled to 4.5% from 5.2% and mortgage interest costs rose at a slower pace, moving from 6.8% to 6.2%. These shifts align with the Bank’s recent policy easing. Despite this moderation, shelter continues to account for over half of the year-on-year increase in headline CPI. Food price growth also moderated, slipping to 3.4% from 3.8%.
The May CPI report brought little in the way of surprises. Headline inflation remains subdued, and while underlying pressures eased slightly, core readings suggest the Bank of Canada is likely to stay cautious. Risks appear to be tilted to the downside, increasing the likelihood of further rate cuts in the second half of the year.
Bulls in Frankfurt, doves in DC
The euro surged to a year-to-date high of $1.1641, driven by both idiosyncratic and US-related developments, with the 2021 peak of $1.1692 now in sight. The pair is up nearly 12% YTD, trading well above its major moving averages and brushing the upper edge of its Bollinger band—a technical indicator that plots a moving average flanked by upper and lower bands, typically two standard deviations apart, to gauge volatility and potential overbought or oversold conditions.
Powell’s unexpectedly dovish tone in congressional testimony yesterday—paired with easing geopolitical tensions—reignited the euro rally. Meanwhile, Germany’s IFO index rose for a sixth consecutive month, reaching 88.4 in June from 87.5 in May, marking the highest level since last summer. The DAX responded with a gain of over 2%, buoyed by hopes that fiscal stimulus could anchor a more sustainable recovery.
Some of the optimism may reflect what still feels like a political honeymoon. The new government has adopted a more measured tone, avoiding the public infighting and abrupt policy shifts that defined its predecessor. Its long-term fiscal strategy—centered on infrastructure and defense—is lending an added layer of stability that’s resonating with businesses and markets alike.
That said, Germany and the broader eurozone continue to navigate choppy waters. Fragile global trade, rising geopolitical tensions, and climbing oil prices keep the macro environment clouded. The honeymoon may be promising—but it’s unfolding under an increasingly unsettled sky.
Looking ahead, Friday’s release of the European Commission’s consumer confidence index will offer insight into whether Germany’s improving sentiment is country-specific or part of a broader regional trend. Still, geopolitical and trade developments are likely to steer near-term euro price action.
Sterling rides the risk-on wave
With a quiet data week ahead for the UK, sterling remains exposed to shifting trade headlines and geopolitical crosswinds. As tensions eased and risk appetite flickered back to life, the pound gained nearly 1% against the dollar and over 0.4% versus the euro. The euro’s revived safe-haven appeal today sharpens the contrast, casting sterling’s sensitivity to risk-on flows into clearer view.
On the domestic front, it was a heavy day for BoE communication, with Megan Greene, Dave Ramsden, Huw Pill, and Sarah Breeden all speaking. Greene acknowledged that inflation may linger above 3% due to second-round effects like wage pressures, but stressed this shouldn’t derail the BoE’s gradual easing path—a clear sign the threshold for a policy pause remains high. Markets took note, nudging the probability of an August cut from 80% to 83.5%.
Still, the dovish tone did little to dull sterling’s momentum. With two cuts largely priced in, it was the improving geopolitical backdrop—not policy chatter—that set the tone for FX markets, and likely will continue to in the days ahead.
Nasdaq, S&P just 1% away from all-time highs
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Key global risk events
Calendar: June 23-27
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quote.
