The US dollar could come under pressure amid hopes of progress in diplomatic talks in the Middle East, although uncertainty around a potential resolution fuels caution.
Sentiment remained fragile after President Donald Trump cancelled a planned diplomatic mission to Islamabad as progress in negotiations remained limited.
However, reports that Iran had submitted a new proposal through intermediaries provided some tentative optimism. Any progress could limit the demand for the dollar as a safe-haven asset.
Despite the mixed signals, the broader macro impact remains skewed toward higher inflation risks as oil prices extended their rally amid concerns over sustained supply disruptions. This dynamic has pushed Treasury yields higher across maturities, as markets continue to expect a cautious monetary policy. The latter could offer support to the US currency.
Looking ahead, attention turns to a critical week for central banks, with the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England all expected to hold rates steady. Markets will focus on policymakers’ assessment of the conflict’s impact on inflation and growth, which is likely to cause volatility in both currency and bond markets.
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