Global markets remained volatile early Wednesday as uncertainty over potential US involvement in the Israel-Iran conflict combined with caution ahead of the Federal Reserve’s monetary policy meeting. This tension was further complicated by unclear developments in US trade negotiations with major economies, including China, prompting traders to consolidate recent moves and adopt a wait-and-see approach.
Speculation grew after multiple media reports suggested the US might join Israel in military actions against Iran, fueled by stern warnings from Washington and provocative statements by Donald Trump, including “We know where the ‘Supreme Leader’ is hiding” and “We now have complete and total control of the skies over Iran.” However, the absence of actual military action—aside from issuing warnings to US consulates in the Middle East—left markets questioning whether these were serious threats or strategic bluffs aimed at pressuring Iran. This lack of escalation offered some relief to traders after a tense session dominated by risk aversion.
Meanwhile, Chinese policymakers continued to show strong support for the Yuan and introduced new measures to stimulate domestic consumption-driven growth while preparing for major trade deals. These steps helped slightly improve market sentiment, especially as investors anticipated a dovish pause from the Federal Reserve, despite mixed signals from the Fed’s dot-plot projections and economic forecasts.
On the economic front, US Retail Sales came in below expectations, the Atlanta Fed’s Q2 GDPNow forecast was downgraded, and Industrial Production contracted, all pointing to signs of cooling momentum. In Asia, Japan’s exports declined and business sentiment weakened, heightening concerns of a potential technical recession following the negative GDP print in Q1. In other regions, the Bank of Canada’s meeting minutes failed to impress, while New Zealand released mixed economic data. In the commodities market, US API weekly crude oil inventories surprised the market with a large drawdown, which temporarily pushed oil prices higher before they began to retreat.
In currency markets, the US Dollar Index (DXY) stalled after a three-day winning streak. The EURUSD recovered from its biggest daily drop in three weeks, the GBPUSD attempted to rebound after its sharpest decline since early April, and the Japanese yen looked set for its first daily gain in four sessions. The Australian and New Zealand dollars held steady following steep losses, while the USDCAD pulled back after posting its strongest daily rise since April 4, bouncing off an eight-month low.
Crude oil buyers paused after Tuesday’s strong rally, while gold prices lacked clear direction following a volatile session. Bitcoin and Ethereum both recovered some of the losses from the previous day. Equities traded mixed after a weak Wall Street close, and bond yields declined as investors moved toward safer assets.
EURUSD consolidates its biggest daily loss in seven weeks as markets await the final Eurozone inflation data for May and the US Federal Open Market Committee (FOMC) Monetary Policy Meeting announcements. Traders remain cautious due to several overlapping factors, including Germany’s openness to a US trade deal and France’s resistance to growing US dominance in the Israel-Iran conflict. Additionally, cautious remarks from European Central Bank (ECB) officials add to market uncertainty. The fragile state of the US-EU trade deal further weighs on the Euro, even as the US Dollar retreats and expectations rise for a dovish pause from the Fed, which continues to give some hope to EURUSD buyers.
GBPUSD was the biggest loser versus the US Dollar the previous day as the broad-based US Dollar strength joined a technical breakdown of the British Pound (GBP). Even so, the Cable pair pared some of its losses early Wednesday, despite witnessing mixed UK inflation data, amid the UK’s trade deal optimism and a sigh of relief from the US part in the Middle East war.
Elsewhere, Japan officials communicate the dead-end in the US-Japan trade talks with no deal at present, whereas the Asian major’s exports slowed for the first time since September 2024 and the manufacturer sentiment also worsened. These catalysts raised doubts about the Bank of Japan (BoJ) rate hikes and challenged the USDJPY pair’s retreat amid mixed sentiment, as well as amid a drop in global bond yields.
The Australian, New Zealand, and Canadian Dollars posted sharp losses against the US Dollar the previous day, as investors rushed toward safe-haven assets amid rising Middle East tensions. USDCAD surged from eight-month lows, even as crude oil prices—Canada’s major export—rallied strongly. The pair’s rise was also driven by the Bank of Canada’s latest meeting minutes, which offered little clarity on future policy moves, despite ongoing concerns over inflation and growth. However, growing optimism around a US-Canada trade deal may have limited further upside in USDCAD earlier today, especially as the US Dollar began to retreat. In New Zealand, a larger-than-expected current account deficit weighed on sentiment, but a slight uptick in consumer confidence helped NZDUSD recover part of its previous day’s losses.
WTI crude oil posted a strong rally the previous day, driven by growing concerns over Middle East tensions and a surprisingly large draw in US weekly stockpiles, as reported by the API. However, prices pulled back ahead of key economic data releases and an expected US decision on whether it will join the Israel-Iran conflict.
Meanwhile, gold made a surprising move by forming a Doji candlestick on the daily chart, despite heightened risk aversion. This hesitation may be due to continued US Dollar strength, a lack of fresh signs of increased physical demand from Asia, and technical indicators pointing to subdued price action for now.
Risk aversion pressured Bitcoin (BTCUSD) and Ethereum (ETHUSD) the previous day, though both later recovered some losses. Supporting this rebound were rising ETF inflows and renewed Bitcoin purchases by MicroStrategy, which helped provide a floor for these risk-sensitive assets.
With the FOMC Rate Statement, Fed Chair Powell’s press conference, economic forecasts, final Eurozone inflation data for May, US jobless claims, weekly oil inventories, and housing data all due this week—and Thursday’s Juneteenth holiday ahead—traders face a busy economic calendar. Another key focus will be the US decision on whether to get involved diplomatically or militarily in the Israel-Iran conflict.
The Fed is expected to hold rates steady, but Powell’s tone, the dot-plot, and forecasts will be closely watched, as markets sense pressure on US policymakers to cut rates despite inflation and growth concerns. If easing geopolitical tensions align with a dovish Fed stance, the US Dollar could pull back, lifting EURUSD—especially if Eurozone inflation remains strong. This scenario could boost gold toward record highs, while crude oil might face pressure if the EIA reports an unexpected rise in inventories.
Meanwhile, GBPUSD and USDJPY may retrace some weekly moves. Antipodean currencies are likely to stay subdued except for USDCAD, and cryptocurrencies may stay pressured amid mixed signals from various catalysts. Overall, market uncertainty is expected to keep riskier assets under pressure, though even a partial resolution in the Middle East could weigh on the US Dollar during what promises to be a volatile week.
May the trading luck be with you!
