The US dollar edged lower on Tuesday but remained close to its highest level in 13 months as investors awaited the release of US inflation data and Federal Reserve Chair Kevin Warsh's testimony before Congress. Ongoing tensions in the Middle East and higher oil prices have reinforced expectations that monetary policy will remain restrictive.

The United States and Iran exchanged military strikes in the Gulf, while shipping through the Strait of Hormuz came close to a standstill. The disruption pushed oil prices toward $90 a barrel and strengthened expectations that global interest rates could remain higher this year.

Fiona Cincotta, market analyst at City Index, said that persistently elevated core inflation combined with rising oil prices continues to support the US dollar. She added that markets will closely watch Warsh's testimony, as he has generally preferred not to provide explicit guidance on the future path of monetary policy.

Warsh recently warned that anyone expecting the Federal Reserve to become complacent in its fight against inflation "will be disappointed," though he stopped short of signaling the likely direction of upcoming interest rate decisions.

Markets await inflation data

Market pricing currently implies roughly a 20% probability of a Federal Reserve rate hike at the July meeting. That expectation has pushed the yield on the benchmark 10-year US Treasury note above 4.6%, its highest level since May, providing additional support for the dollar.

Federal Reserve Governor Christopher Waller also said interest rates may need to move higher "in the near term" if incoming data shows inflation remains above the central bank's 2% target.

Economists surveyed by Reuters expect annual US inflation to reach 3.8% in June, while core inflation, which excludes food and energy prices, is forecast at 2.8%.

Currency movements

The euro rose 0.2% to $1.1399, while sterling gained 0.2% to $1.337.

Short-term volatility in currency markets also increased, with the one-day implied volatility index for the euro climbing above 10%, signaling stronger demand for protection against sharp exchange-rate swings.

Yen remains under pressure

The Japanese yen rose 0.1% to 162.27 per dollar but remained close to its weakest level in 40 years, keeping markets alert to the possibility of intervention by Japanese authorities to support the currency.

The move followed comments from Japanese Finance Minister Satsuki Katayama, who said the government may consider adjusting the asset allocation of state pension funds if investment conditions change significantly.

Health Minister Kenichiro Ueno also said the government would review the asset allocation of the Government Pension Investment Fund if necessary, although he ruled out any immediate changes.

Masafumi Yamamoto, Chief Currency Strategist at Mizuho Securities, said any sustained support for the yen would require a swift decision to increase the share of domestic assets in the pension fund's portfolio by at least five percentage points for both equities and bonds. He warned that only limited or gradual adjustments would have little impact on the Japanese currency.

Gold prices rose in European trading on Tuesday, holding above the two-week low reached earlier in the Asian session and heading for their first gain in three days, supported by bargain buying and a pause in the US dollar's advance against a basket of global currencies.

Federal Reserve Governor Christopher Waller said interest rates may need to rise if key June inflation data, due later on Tuesday, comes in stronger than expected.

The Price

• Gold prices rose 0.8% to $4,034.17 an ounce, from the opening level of $4,002.12, after touching a low of $3,983.64, the weakest level since July 1.

• At Monday's settlement, gold prices fell 2.9%, posting their second consecutive daily loss, pressured by a stronger dollar and higher oil prices as military tensions between the United States and Iran escalated.

US dollar

The dollar index fell around 0.25% on Tuesday, retreating from a two-week high of 101.33 and reflecting a pause in the US currency's advance against a basket of major and minor currencies.

As is widely known, a weaker US dollar makes dollar-denominated gold more attractive to buyers holding other currencies.

In addition to profit-taking, the dollar weakened as investors refrained from building new long positions ahead of the release of key US inflation data for June, which could provide crucial clues on whether the Federal Reserve will raise interest rates this year.

Global oil prices

Oil prices rose more than 3% on Tuesday, extending gains for a second consecutive session and reaching their highest level in a month as military strikes between the United States and Iran continued to intensify around the Strait of Hormuz.

Higher global oil prices are renewing concerns over accelerating inflation, which could prompt central banks around the world to raise interest rates in the near term.

Latest developments in the Iran conflict

• US forces carried out an intensive five-hour bombing campaign targeting Islamic Revolutionary Guard Corps military sites in several Iranian cities.

• US President Donald Trump proposed imposing a 20% tariff on goods transiting the Strait of Hormuz and reinstating the blockade on Iran.

• US Central Command officially announced that it would resume the naval blockade of vessels traveling to and from Iranian ports at 4:00 p.m. ET on Tuesday.

• Iran's Revolutionary Guard announced the launch of additional missiles and drones against US bases in several Gulf states, while also targeting oil tankers attempting to transit the Strait of Hormuz.

US interest rates

• Federal Reserve Governor Christopher Waller said on Monday that the US central bank may need to raise interest rates "in the near term" if incoming data shows inflation remains well above the 2% target.

• Following those remarks, CME Group's FedWatch tool showed that the probability of the Federal Reserve leaving rates unchanged at its July meeting fell from 68% to 59%, while the probability of a 25-basis-point rate hike rose from 32% to 41%.

• The probability of the Fed keeping rates unchanged at its December meeting also fell from 24% to 10%, while the probability of a 25-basis-point hike increased from 76% to 90%.

• Investors are awaiting the release of key US inflation data for June later on Tuesday to reassess those expectations.

Kevin Warsh

At 14:00 GMT, new Federal Reserve Chair Kevin Warsh will deliver his first semiannual testimony before the House Financial Services Committee in Washington, DC.

Gold outlook

Financial markets strategist Ilya Spivak said markets may be reluctant to make decisive moves given the wide range of potential risks.

Spivak added that investors will be watching both Warsh's testimony and the consumer price index data, alongside developments in the Middle East.

SPDR fund

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, were little changed on Monday at 1,002.45 metric tons, the lowest level since July 2.

The euro edged higher against a basket of major global currencies during European trading on Tuesday, attempting to recover from a two-week low against the US dollar and heading for its first daily gain in three sessions, supported by a pause in the dollar's recent rally ahead of the release of key US inflation data for June.

As global oil prices continue to surge, inflationary pressures are mounting on European Central Bank policymakers, reinforcing expectations that the ECB could raise interest rates at its September meeting.

The Price

• The euro rose around 0.15% against the US dollar to $1.1397, after opening at $1.1382 and touching an intraday low of $1.1378.

• The euro closed Monday down 0.3% against the dollar, marking its second consecutive daily loss and falling to a two-week low of $1.1377 as renewed military tensions between the United States and Iran boosted demand for the greenback.

US dollar

The US Dollar Index slipped more than 0.1% on Tuesday, pulling back from a two-week high of 101.33 as the greenback paused its advance against a basket of global currencies.

Alongside profit-taking, investors have refrained from adding fresh long-dollar positions ahead of the release of June's US inflation data, which is expected to provide crucial clues about whether the Federal Reserve will raise interest rates later this year.

Federal Reserve Governor Christopher Waller said on Monday that the US central bank may need to raise interest rates "in the near term" if upcoming data shows inflation remains well above the Fed's 2% target.

Global oil prices

Oil prices climbed more than 2% on Tuesday, extending gains for a second consecutive session to their highest level in a month as military exchanges between the United States and Iran continued around the Strait of Hormuz.

The continued surge in oil prices has revived fears of accelerating inflation, increasing the likelihood that major central banks could raise interest rates in the near future, marking a sharp reversal from pre-war expectations for rate cuts or an extended pause in monetary tightening.

Latest developments in the Iran conflict

• US forces carried out an intensive five-hour bombing campaign targeting Revolutionary Guard military positions in several Iranian cities.

• President Donald Trump proposed imposing a 20% tariff on goods passing through the Strait of Hormuz and reinstated the naval blockade on Iran.

• CENTCOM officially announced that it will resume enforcing the naval blockade on vessels traveling to and from Iranian ports beginning at 4:00 p.m. US Eastern Time on Tuesday.

• Iran's Revolutionary Guard announced additional missile and drone attacks on US bases in several Gulf countries, while also targeting oil tankers attempting to transit the Strait of Hormuz.

European interest rates

• Amid the rally in global oil prices, money markets have raised the probability of a 25-basis-point European Central Bank rate hike in July to above 35%.

• Markets are now pricing the probability of a 25-basis-point ECB rate increase at the September meeting above 95%.

• Investors are awaiting additional eurozone data on inflation, employment, and wage growth to reassess expectations for the ECB's policy path.

The Japanese yen strengthened against a basket of major and minor currencies during Asian trading on Tuesday and was on track to post its third gain in the past four sessions against the US dollar, benefiting from a pause in the dollar's recent rally ahead of the release of key US inflation data for June.

Global oil prices continued to surge as military exchanges between the United States and Iran intensified around the Strait of Hormuz, reviving concerns over mounting inflationary pressures on central banks and reinforcing expectations that interest rates will remain elevated or that additional monetary tightening could be required in the near term.

The Price

• The US dollar fell around 0.15% against the yen to ¥162.22, after opening at ¥162.43 and reaching an intraday high of ¥162.47.

• The yen ended Monday down 0.5% against the dollar, marking its first daily loss in the previous three sessions, as renewed tensions surrounding the Strait of Hormuz boosted demand for the US currency.

US dollar

The US Dollar Index fell more than 0.1% on Tuesday, retreating from a two-week high of 101.33 as the greenback paused its advance against a basket of global currencies.

In addition to profit-taking, investors refrained from building fresh long-dollar positions ahead of the release of June's US inflation data, which is expected to provide crucial guidance on whether the Federal Reserve will raise interest rates later this year.

Federal Reserve Governor Christopher Waller said on Monday that the US central bank may need to raise interest rates "in the near term" if upcoming data shows inflation remains well above the Fed's 2% target.

Global oil prices

Oil prices climbed more than 2% on Tuesday, extending gains for a second consecutive session and reaching their highest level in a month as military strikes between the United States and Iran continued around the Strait of Hormuz.

The sustained rally in oil prices has renewed fears of accelerating inflation, increasing the likelihood that central banks may raise interest rates in the near future, marking a sharp reversal from pre-war expectations for rate cuts or an extended pause in policy tightening.

Latest developments in the Iran conflict

• US forces carried out an intensive five-hour bombing campaign targeting Revolutionary Guard military positions in several Iranian cities.

• President Donald Trump proposed imposing a 20% tariff on goods passing through the Strait of Hormuz and reinstated the naval blockade on Iran.

• CENTCOM officially announced that it will resume enforcing the naval blockade on vessels traveling to and from Iranian ports beginning at 4:00 p.m. US Eastern Time on Tuesday.

• Iran's Revolutionary Guard announced additional missile and drone attacks on US bases in several Gulf countries, while also targeting oil tankers attempting to transit the Strait of Hormuz.

Japanese interest rates

• Amid rising global oil prices, markets have increased the probability of a 25-basis-point rate hike by the Bank of Japan to above 30%.

• The probability of a quarter-point rate increase at the Bank of Japan's October meeting has climbed above 85%.

• Investors are now awaiting additional Japanese data on inflation, employment, and wage growth to reassess the outlook for Bank of Japan policy.