10.06.202608:34 Forex Analysis & Reviews: The Middle East Again on the Brink of Full-Scale Escalation

The currency market reacted very quickly to the news that the Middle East is again on the brink of full-scale escalation. The dollar rose while other currencies fell after news that the US struck Iranian air defense systems, ground control points, and radars near the Strait of Hormuz after Trump accused Tehran of destroying an American Apache military helicopter.

Iran immediately responded: the IRGC announced drone strikes on the headquarters of the US Fifth Fleet in Bahrain, as well as on American military facilities in Jordan and Kuwait. Explosions were also reported on Qeshm Island and along Iran's southern coast.

Despite all that is happening, Trump characterized the retaliation as "very strong and very powerful"; however, the US Central Command chose its words carefully—the operation was described as a "proportional response," signaling Washington's desire to contain the confrontation without transitioning to a full-scale renewal of war.

Iranian Foreign Minister Araghchi stated that the country would not leave any attack unanswered. However, by evening, both Iran and Israel announced a cessation of mutual strikes, with the caveat that this eased market pressure and led to a slight rebound in risk assets. Netanyahu promised to refrain from firing at Iran if it does not strike again, although he confirmed the intention to continue operations against Hezbollah in Lebanon. Iranian military command warned that if strikes in Lebanon continue, the response would be "much harsher and more devastating."

In addition to developments in the Middle East, the second important event today will be the US Bureau of Labor Statistics' report on the Consumer Price Index (CPI) for May. The consensus forecast suggests a CPI increase of 4.2% year-over-year compared to 3.8% in April—this would be the highest figure since April 2023 and significantly above the average of 2.8% over the last 12 months. Month-over-month, a growth of 0.5% is expected compared to 0.6% in April. Core inflation, excluding food and energy, is projected to rise to 2.9% year-over-year from 2.8% in April, while month-over-month is expected to slow to 0.3% from 0.4%.

It is worth noting that this report is being released at an extremely tense moment. The May Non-Farm Payrolls report, released last Friday, showed employment growth more than double expectations—causing the euro, pound, and other assets to plummet against the dollar—and markets have fully priced in a Federal Reserve rate hike by the end of the year. According to the CME FedWatch tool, the probability of at least one rate hike in the US in 2026 exceeds 70%. If the CPI data comes in above consensus, the new Fed Chairman, Kevin Warsh, will find himself in a situation where, at his first meeting on June 16–17, he will need to send strong signals to the market. This is a positive scenario for the dollar.

As for the current technical picture of EUR/USD, bulls need to consider how to reclaim the 1.1555 level. Only this will allow them to aim for a test at 1.1580. From there, one could reach 1.1600, but doing this without support from major players will be quite problematic. The furthest target will be the high of 1.1625. If the trading instrument declines toward 1.1530, I expect serious action from major buyers. If no one is there, it would be prudent to wait for a new low of 1.1505 or open long positions from 1.1480.

As for the current technical picture of GBP/USD, pound buyers need to reclaim the nearest resistance at 1.3390. Only this will allow them to aim for 1.3415, which will be quite difficult to break through. The furthest target will be the area of 1.3440. If the pair falls, bearish traders will try to gain control over 1.3360. If they succeed, a breakout of this range will deliver a serious blow to bullish positions and push GBPUSD down to a low of 1.3330, with the prospect of reaching 1.3299.