Daily Market Update
May 18, 2026EUR/USD ranged from the low to mid 1.16’s overnight. EUR/USD is extending the bounce toward 1.1650 in European trading on Monday.
The pair rebounds, but remains vulnerable as the US Dollar will remain the go-to safe-haven asset amid renewed escalation in the Middle East war and surging Oil prices-linked inflation fears.
Several Fed officials recently emphasized that controlling inflation is their top priority, even suggesting that further interest rate hikes could be necessary if price pressures persist.
Financial markets have sharply increased the likelihood of a December rate hike to nearly 48%, up significantly from just 14% a week prior, according to the CME FedWatch tool.
The Greenback also receives support from increased safe-haven demand amid ongoing geopolitical conflicts. The United States (US) and Iran remain far from an agreement to end weeks of fighting and reopen the critical Strait of Hormuz shipping route.
US President Donald Trump escalated tensions by publicly warning Iran to make progress or face new consequences. Because the Strait remains effectively closed, global oil prices are continuing to climb, which places a heavy economic burden on countries that rely heavily on energy imports.
Global investor anxiety is heightened further by warnings from Chinese leader Xi Jinping to President Trump that Taiwan could trigger direct clashes between their two economies.
However, the downside of the EUR/USD pair could be restrained as the Euro (EUR) may gain ground amid hawkish sentiment surrounding the European Central Bank (ECB) policy outlook.
Against the backdrop of rising bets for an interest rate hike by the Federal Reserve (Fed) in 2026, the risk of a further escalation of geopolitical tensions in the Middle East continues to underpin the safe-haven Greenback.
In fact, US President Donald Trump warned Iran that the “clock is ticking” and that there “won’t be anything left” if action is not taken soon, adding that “time is of the essence.” Adding to this, the Times of Israel reported on Saturday that Israel and the US are actively advancing military preparations to potentially resume coordinated attacks against Iran.
Furthermore, major disagreements over Iran’s nuclear program and the Strait of Hormuz dampen hopes for a peace deal, lifting Crude Oil prices to a two-week top. This revives inflationary concerns and bolsters market expectations for a more hawkish Fed.
According to the CME Group’s FedWatch Tool, traders are now pricing over a 50% chance that the US central bank will raise borrowing costs by the end of this year. The outlook, in turn, remains supportive of elevated US Treasury bond yields and further benefits the USD, which is seen weighing on the GBP/USD pair.
The British Pound (GBP), on the other hand, is pressured by domestic political uncertainty amid calls for UK Prime Minister Sir Keir Starmer to step down, following the ruling Labour Party’s hefty losses in the recent local elections.
Moreover, UK Health Minister Wes Streeting’s resignation last Thursday points to a deepening crisis within the party, which, in turn, backs the case for a further near-term depreciating move for the Sterling and the GBP/USD pair.
Elevated oil prices intensified inflation concerns and strengthened expectations for a near-term rate hike by the Bank of Japan (BoJ), which could limit the downside of the JPY. Last week, Bank of Japan board member Kazuyuki Masu urged a swift interest rate hike, pointing to growing, persistent inflation risks driven by the ongoing war.
Japan’s Chief Cabinet Secretary, Seiji Kihara, stated that the administration is monitoring market movements, including long-term interest rates, with a very high sense of urgency. Despite the heightened vigilance, Kihara declined to comment on the possibility of government intervention in the foreign exchange markets.
However, the upside of the USD/JPY pair could be restrained as the US Dollar (USD) faces selling pressure on easing safe-haven demand.
The Iranian foreign ministry has confirmed that indirect diplomatic channels with the United States remain operational despite the recent rise in tensions between the two nations.
Officials in Tehran clarified that while the broader process of dialogue is currently navigating a highly challenging path, communication has not broken down.
Source FX Street
