The US dollar was relatively stable as markets continue to react to geopolitical developments in the Middle East as well as changing monetary policy expectations.
Hopes that the diplomatic process between the US and Iran could be revived and an agreement could be reached could weigh on the currency and on bond yields if oil prices decline.
However, the lack of tangible progress and ongoing threats to shipping in the region continue to fuel uncertainty and support safe-haven demand.
On the monetary policy front, Kansas City Fed President Jeff Schmid said that inflation remains his primary concern, arguing that policy does not appear restrictive enough and that tighter settings will be required to bring inflation back to 2%. While markets still lean towards a hike at the next meeting, which could keep yields supported, the probability of another hold has climbed above 40%. Softer monetary policy expectations could leave yields and the dollar exposed to downside risks.
Looking ahead, today’s ISM services PMI and Friday’s payrolls report are likely to influence monetary policy expectations, with firmer readings likely to reinforce tightening bets and lift yields and the dollar, while softer prints could push anticipations toward a less hawkish stance.
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