Forex Today: Mideast uncertainty keeps USD supported ahead of next batch of US data

On Tuesday, August 4, the US Dollar (USD) exhibited stability following a moderate recovery on Monday as optimism surrounding a potential resolution to the Middle East conflict waned. The economic data for the United States would be released later in the day, comprising Goods Trade Balance, JOLTS Job Openings, and Factory Orders reports for June.

Throughout the week, the USD demonstrated strength against the New Zealand Dollar. The heat map illustrated the percentage changes among major currencies, with USD leading in gains. The market displayed risk-positive sentiment at the start of the week after President Donald Trump announced the suspension of planned attacks on Iran and the resumption of talks.

Trump declared Iran had "one last chance" to sign a deal, a claim Iran refuted. Crude Oil prices initially dropped more than 7% on Monday but recovered early Tuesday, trading near $79.50, up approximately 1% for the day. Analysts at Commerzbank noted this decline was due to a sudden shift in geopolitical expectations following Trump's call for a planned strike to be postponed, which prompted a sharp fall in oil prices.

However, they emphasized that the risk premium had not fully vanished and highlighted the ongoing uncertainty about waterway shipping. The USD Index rebounded from its lowest level since mid-June, closing the day marginally higher. In the European morning of Tuesday, the USD Index fluctuated in a narrow range above 100.00, while USD/JPY showed a wide range before closing virtually unchanged.

Analysts at MUFG noted that recent joint FX interventions by the US and Japan involved some additional details, including Scott Bessent's emphasis on expanding the FIMA facility to provide short-term Dollar liquidity to foreign central banks. This intervention indicated concerns over potential forced selling of US Treasuries in the medium term.

EUR/USD remained relatively stable, closing in negative territory on Monday, and holding steady around 1.1500 in the European morning of Tuesday. GBP/USD experienced a slight decline of about 0.4% on Monday but stabilized above 1.3400 early Tuesday. Gold's (XAU/USD) value fluctuated throughout the week, ending slightly higher above $4,000 and remaining in a consolidation phase above $4,050 in the European morning.

ING strategists observed that Gold's recovery was hampered by a mix of improving geopolitical sentiment and uncertainties surrounding US interest rates. Any further decline in energy prices could support bullion, but higher-than-expected US interest rates could limit upside, despite the more favorable geopolitical and inflation outlook.

The terms "risk-on" and "risk-off" describe the level of risk investors are willing to take during a given period. In a "risk-on" market, investors are optimistic and more inclined to purchase riskier assets. Conversely, in a "risk-off" market, investors tend to adopt a more cautious approach, favoring less risky assets with stable returns.

During "risk-on" periods, stock markets generally rise, most commodities (except Gold) gain value, and currencies of commodity-exporting nations strengthen. Conversely, in "risk-off" markets, bonds perform well, Gold shines, and safe-haven currencies like the US Dollar, Japanese Yen, and Swiss Franc benefit. Examples of currencies that typically rise in "risk-on" environments include the Australian Dollar, Canadian Dollar, New Zealand Dollar, and minor currencies like the Ruble and South African Rand due to their heavy reliance on commodity exports.

Conversely, the US Dollar, Japanese Yen, and Swiss Franc tend to strengthen during "risk-off" periods due to increased demand for their respective government bonds and enhanced capital protection measures.