Risk radar on, but no panic in markets yet

Dollar leads as markets navigate geopolitical and monetary crosscurrents

The US dollar extended its advance at the start of the week, with the Dollar Index rising as much as 0.5% and the greenback strengthening against all G-10 currencies. Despite growing geopolitical tensions in the Middle East, haven flows were uneven. The yen, traditionally a safe haven, was the day’s worst performer, while the Swiss franc trailed only the dollar. Crude oil rebounded marginally, and US equity futures remained in positive territory—an indication that investors are cautious but not panicked.

The muted risk-off tone comes in the wake of heightened tensions following US airstrikes targeting Iranian nuclear sites in Fordo, Natanz, and Isfahan. The escalation prompted strong rhetoric from Tehran but stopped short of immediate retaliation. While such events typically boost gold, the rally was capped. This time, the weight of a firm dollar and rising Treasury yields, driven by the Federal Reserve’s cautious outlook, limited upside for the yellow metal. With the Fed projecting only two cuts in 2025 and minimal easing through 2027, gold’s appeal as a non-yielding asset remains under pressure.

Powell’s testimony unlikely to shift policy narrative

Fed Chair Jerome Powell’s upcoming testimony to Congress, scheduled for Tuesday and Wednesday, is not expected to reveal significant shifts in the central bank’s stance. The Fed left interest rates unchanged last week and updated its economic projections to reflect a more conservative outlook on policy easing. The Monetary Policy Report reiterated a cautious, data-dependent approach amid tariff-related uncertainty.

Powell is expected to stress that monetary policy is “in a good place” and that officials are closely monitoring how new tariffs may pass through to inflation. His recent remarks highlighted the high degree of uncertainty facing policymakers, with no member expressing strong confidence in the current projections. While markets are still pricing in a potential rate cut in September, Powell is likely to maintain a neutral tone without committing to any specific timeline.

Global data calendar offers key tests

This week brings a slate of economic indicators that could test the resilience of the US economy under the weight of new tariffs. Durable goods orders, preliminary PMIs, the goods trade balance, and consumer confidence will be closely watched for signs of momentum or fatigue in both consumer and business sectors.

In Europe, sentiment is improving on the back of expectations for fiscal support and early signs of recovery. Germany’s Ifo survey and the Eurozone PMIs will be scrutinized for confirmation that the region’s growth momentum is picking up.

Asia presents a contrasting picture. The Summary of Opinions from the Bank of Japan’s June meeting could reveal rising doubt about further rate hikes in 2025, likely pushing expectations for the next tightening into 2026. In Australia and Canada, upcoming inflation prints will play a pivotal role in shaping market expectations for the timing and depth of rate cuts from the RBA and BoC, respectively.