Forex Today: US Dollar struggles to extend rebound as focus remains on Middle East

Here is what you need to know on Tuesday, July 21:

Major currency pairs remain within familiar ranges early Tuesday as investors refrain from taking large positions, while keeping a close eye on headlines surrounding the Middle East crisis. ZEW Survey's sentiment data for Germany and the Eurozone will be featured in the European economic calendar. In the second half of the day, there won't be any high-impact data releases from the United States (US).

Following Monday's volatile action, crude Oil prices correct lower early Tuesday, with the barrel of West Texas Intermediate losing about 0.5% on the day, near $82.

Although news of mediators proposing a 10-day cessation of strikes to find ways to revive the interim deal between the US and Iran helped Oil prices retreat on Monday, the military agression between sides continued. US President Donald Trump warned that Tehran will pay for the deaths of service members and the US military launched attacks for the 10th consecutive day, with explosions reported near Sirik and in Bandar Abbas, Qeshm Island, Chabahar and Konarak. Iran retaliated by targeting US assets accross the Gulf.

Oil gains as Middle East tensions persist and USD risks reprice

Deutsche Bank notes that hopes for a diplomatic opening in the Middle East conflict emerged after a spokesman for Iran’s foreign ministry said that “ideas from some mediators have been conveyed” to Iran. However, the bank points out that “escalating rhetoric from the Houthis in Yemen as well as from President Trump meant Brent crude still closed +1.27% higher at $89.22/bbl.” Building on this, OCBC warns that “a larger escalation could revive fears of a prolonged supply shock and drive oil prices back above USD100/bbl.” The bank cautions that “such an outcome would likely trigger higher market volatility, erode the appeal of FX carry trades, and support a renewed USD rally,” as investors reassess geopolitical and energy-related risks.

The US Dollar (USD) Index started the week on a bullish note and gained more than 0.2% on Monday. In the European morning on Tuesday, the USD Index moves sideways, slightly below 101.00.

Fed faces growing pressure as energy costs stay elevated

Commerzbank’s Volkmar Baur cautions that “the longer oil and energy prices remain high, the harder it will be for the Federal Reserve (Fed) to resist raising the policy rate.” He notes that, while “the Fed will point to the core rate – which excludes energy prices,” the persistence of elevated energy costs means “persistently high energy prices make second-round effects increasingly likely,” complicating the central bank’s efforts to look through headline pressures.

The data published by the UK's Office for National Statistics (ONS) showed on Tuesday that the ILO Unemployment Rate remained unchanged at 4.9% in the three months to May. In this period, Average Earnings Excluding Bonus rose by 4.3% on a yearly basis, falling short of the market expectation of 4.5%. GBP/USD clings to small gains at around 1.3450 following a three-day slide. The ONS will publish June inflation data on Wednesday.

Statistics New Zealand reported early Tuesday that the Consumer Price Index (CPI) rose by 4.1% on a yearly basis in the second quarter. This print followed the 3.1% increase recorded in the first quarter and came in above the market expectation of 4%. NZD/USD gathers bullish momentum and trades at its highest level since early June above 0.5850.

EUR/USD moves sideways at around 1.1420 after posting marginal losses on Monday.

USD/CAD stays in a consolidation phase above 1.4050 after closing in positive territory on Monday. Statistics Canada reported that the annual CPI inflation softened to 2.8% in June from 3.2% in May. In the meantime, the White House announced that US President Donald Trump will impose a new tariff of 50% on most Canadian products in response to what it called Canada's "discriminatory treatment" of US cars, alcohol, and dairy.

USD/JPY holds steady near 162.50 in the European morning on Tuesday. Japan's Prime Minister (PM) Sanae Takaichi said earlier in the day that the government will guide economic and fiscal policy while paying close attention to fiscal sustainability and will focus on maintaining market trust.