The dollar held steady on Thursday as market sentiment remained cautious amid the risks for further escalation in the Middle East.
While hopes of a diplomatic breakthrough weighed on yields recently, increasing doubts about the state of the talks between the US and Iran supported a rebound, which could help strengthen the greenback.
A return of energy prices to the upside could continue to reinforce inflationary fears.
This backdrop has prompted markets to scale back expectations for Federal Reserve interest rate cuts this year, with forecasts pointing to rates staying unchanged for a longer period of time than previously anticipated, supporting both the dollar and Treasury yields.
With the narrative firmly anchored around the impact of the Middle East tensions on inflation, economic data could also influence sentiment as markets remain sensitive to the health of the US economy. In this regard, today’s weekly jobless claims could provide more signals on labour market conditions and could affect monetary policy expectations to a certain extent in the case of a surprise. A large increase in claims could revive concerns about economic softening, potentially challenging the cautious rate narrative and capping further yield increases.
