US dollar slips from recent highs as market focus shifts to inflation data

The US Dollar retreated from a two-month high during early European trading on Tuesday, with the US Dollar Index (DXY) falling to around 99.85 as concerns surrounding Middle East hostilities showed signs of easing.

Market participants are now turning their attention to upcoming US inflation data, which could provide further insight into the Federal Reserve's monetary policy trajectory.

Investors are closely monitoring the release of the US Consumer Price Index inflation report scheduled for Wednesday, followed by the Producer Price Index (PPI) data on Thursday.

The figures are expected to play a significant role in shaping expectations regarding future interest rate decisions by the Federal Reserve.

Rate hike expectations increase

Market expectations for higher US interest rates have strengthened in recent weeks.

According to the CME FedWatch tool, traders are currently pricing in a 43.2% probability of a 25-basis-point interest rate increase in December.

This marks a notable rise from approximately 14% a month ago.

The shift in expectations comes as investors continue to assess economic data and the broader policy outlook from the Federal Reserve.

Middle East developments influence market sentiment

Developments in the Middle East also remained in focus.

US President Donald Trump said on Tuesday that he could have a proposal regarding an agreement with Iran within days.

Earlier on Monday, Israeli Prime Minister Benjamin Netanyahu stated that the conflict involving Iran and the Lebanon-based Hezbollah group "has not yet ended," while maintaining that both adversaries were weaker than before.

Meanwhile, Iran announced the conclusion of its military operations against Israel.

However, the country's central military command warned that if Israel continued military actions, including operations in southern Lebanon.

The easing of immediate tensions contributed to reduced demand for traditional safe-haven assets, including the US Dollar.

Strong chinese trade data supports market confidence

Economic data released by China's General Administration of Customs indicated stronger trade activity in May.

China's trade surplus widened to $105.43 billion in May from $84.82 billion in April.

Exports increased 19.4% year-on-year, accelerating from 14.1% growth in April and surpassing market expectations of 15.0%.

Imports also exceeded forecasts, rising 27.4% year-on-year compared with 25.3% previously and above the consensus estimate of 25.0%.

The stronger-than-expected trade figures suggested continued resilience in China's external sector.

German industrial output shows improvement

In Europe, Germany's industrial sector showed signs of recovery.

Data from Destatis revealed that Germany's Industrial Production increased by 0.4% month-on-month in April.

The reading followed a 0.1% decline in March and matched market expectations.

On an annual basis, industrial production declined 0.5%, an improvement from the revised 3.4% contraction recorded in March.

The data provided some support for sentiment surrounding the eurozone economy.

Major currency moves

The euro gained ground against the US Dollar, with EUR/USD advancing toward 1.1550 during European trading hours.

Market participants are also focused on the upcoming European Central Bank policy meeting on Thursday, where the ECB is expected to raise its benchmark interest rate for the first time in nearly three years.

The British pound also strengthened, with GBP/USD recovering above 1.3350 after touching a three-week low.

Meanwhile, USD/JPY remained relatively stable near 160.15.

Traders continued to monitor the possibility of intervention by Japanese authorities to support the yen.

Japan's Finance Minister Satsuki Katayama reiterated on Tuesday that the government's position remained unchanged and that authorities stood ready to take decisive action if necessary.

Gold edges higher

Gold prices posted modest gains on Tuesday, trading near $4,340.

Despite the recovery, the precious metal remained close to its lowest level since March 24.

Ongoing uncertainty surrounding developments in the Middle East, combined with growing expectations of a potential US interest rate increase, continued to weigh on sentiment toward the yellow metal.

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