The dollar remained close to its 10-day lows on Tuesday, as a deal to conclude the Iran war enhanced risk appetite. Meanwhile, the yen hovered near the significant 160 level following the Bank of Japan’s rate hike, a move that was widely anticipated to address inflationary pressures stemming from the conflict. U.S. President Donald Trump announced that a preliminary agreement aimed at concluding the conflict in the Middle East has been signed between the U.S. and Iran. Details remain undisclosed, yet global markets responded positively, resulting in a decline in oil prices. Investor focus this week is directed towards a series of central bank meetings, including those of the Bank of England and the U.S. Federal Reserve, which are scheduled in the coming days. The aim is to assess whether the resolution of the conflict has arrived too late to alleviate immediate inflation worries. The Bank of Japan raised interest rates to a 31-year high on Tuesday as widely expected, leaving markets little surprised.

However, the 7-1 vote was highlighted by market observers, indicating some ambiguity regarding the timing of the next increase. “The only dissent on the rate was ​Asada’s on dovish grounds… with the path from here made explicitly conditional on the Middle East and the oil pass through, a still wide rate differential with ​the U.S. will struggle to support JPY,” said Kieran Williams. Over the medium term, the pressure on the yen is unlikely to ease solely from the rate hike, he stated, “leaving intervention risk as a live near-term risk. Uchida’s presser is the swing factor, how he frames the pace of the next hike will be ​in focus.” The focus now shifts to Deputy Governor Shinichi Uchida’s press briefing at 0630, where he is expected to reaffirm the BOJ’s commitment to persist in raising rates, while steering clear of providing specific indications regarding the timing of the next rate hike.

The Japanese yen was at 160.23 per U.S. dollar, remaining close to the 160 threshold that has made traders cautious about potential interventions from Tokyo, with even the peace deal seeming unlikely to offer respite for the struggling yen. The Australian dollar experienced a decline of 0.3%, settling at $0.705, following the Reserve Bank of Australia’s unanimous decision to maintain interest rates steady after three consecutive increases, despite ongoing elevated inflation levels. The U.S.-Iran agreement aims to prolong a fragile ceasefire established in April for an additional 60 days and to reopen the Strait of Hormuz, which Tehran has largely obstructed since the U.S. and Israel’s offensive against Iran in February. The currency market’s response was limited in comparison to other sectors as traders anticipated remarks from central bankers worldwide this week. The euro was at $1.159, just below the 10-day high of $1.1622 it reached on Monday. Sterling last traded at $1.3413 in early trade on Tuesday. The dollar index, which measures the U.S. currency against six other units, was at 99.66.

The index has increased by 2% since the onset of the conflict at the end of February, reflecting a volatile response to a fragile ceasefire and ongoing reciprocal attacks. “While energy markets moved quickly to price out the immediate risk of prolonged supply disruptions, the path back to normal flows remains far from straightforward,” stated Tony Sycamore. Questions surrounding the normalisation of supply chains are expected to maintain a level of unease among investors, as the immediate trajectory for inflation and interest rates remains ambiguous. Analysts indicated that the market response has outpaced the actual conditions, and it may be influenced by the potential for an agreement. “A more durable repricing requires safe, predictable and insured shipping through the Strait of Hormuz,” they stated in a note. And demand could likely be higher than usual as depleted reserves need to be replenished. Re-escalation risks have diminished, yet they remain a possibility.