Dollar holds ground as investors await ECB policy announcement

Major currency pairs traded within narrow ranges during the European session on Thursday after experiencing heightened volatility in the previous session.

Investors turned their attention to the European Central Bank's monetary policy announcement and upcoming US producer inflation data, both of which were expected to provide fresh direction to financial markets.

US Inflation data triggers market volatility

Market sentiment remained influenced by the latest inflation figures released in the United States on Wednesday.

Data showed that annual inflation, measured by the Consumer Price Index, rose to 4.2% in May, marking its highest level in three years.

At the same time, core CPI, which excludes food and energy prices, increased by 0.2% every month.

The reading came in below both April's 0.4% rise and market expectations of a 0.3% increase.

The US Dollar Index initially weakened following the release of the inflation data.

However, the currency later recovered as investors sought safe-haven assets during the American trading session.

The rebound came despite a sharp decline in major Wall Street indices.

By the close of trading, the Dollar Index had returned to positive territory and finished above the 100.00 mark.

Geopolitical tensions support safe-haven demand

Investor sentiment continued to be shaped by escalating tensions in the Middle East.

After US President Donald Trump stated that Tehran was taking too long to reach an agreement, the US military announced that it had launched attacks against multiple targets in Iran and described the operations as self-defense.

Iran responded through its Islamic Revolutionary Guards Corps (IRGC), which targeted US forces stationed at bases in Kuwait, Bahrain, and Jordan.

The developments heightened concerns across global markets and contributed to increased demand for traditional safe-haven assets.

Oil retreats after sharp rally

Crude oil prices moved lower during Thursday's early trading after posting strong gains a day earlier.

West Texas Intermediate crude, which had surged more than 3% on Wednesday, traded near $88 per barrel and was down approximately 2.5% on the day.

At the same time, US stock index futures pointed to a stronger opening, rising between 0.6% and 1%.

The US Dollar Index also edged slightly lower, trading just below the 100.00 level.

ECB rate decision in focus

The ECB remained the primary focus for European investors.

Markets broadly expected the central bank to raise key interest rates by 25 basis points.

Investors were also preparing to assess updated macroeconomic projections and comments from ECB President Christine Lagarde for clues about the future policy path.

Ahead of the announcement, EUR/USD traded steadily around 1.1500.

BoC maintains patient stance

The Bank of Canada left its benchmark interest rate unchanged at 2.25%, in line with market expectations.

The central bank's statement and remarks from BoC Governor Tiff Macklem indicated a cautious approach.

Policymakers highlighted the need to balance lingering inflation risks against an economy that continues to operate with excess supply.

USD/CAD ended Wednesday largely unchanged before moving modestly higher on Thursday to trade above 1.3950.

Yen, pound, and precious metals

USD/JPY extended gains after reaching its strongest level near 160.60 since Japan's intervention in the foreign exchange market on April 30.

The pair later stabilised near 160.50 during European trading hours.

GBP/USD remained confined to a narrow range below 1.3400.

In precious metals, gold suffered heavy losses on Wednesday, falling more than 4%.

The metal extended its decline during the Asian session and briefly dropped below $4,030, its lowest level since November 2025.

However, buyers returned later in the day, helping gold recover to around $4,100.

Silver also rebounded after falling to an 11-week low.

The metal traded near $64.00 per troy ounce during Asian trading, recovering from an intraday low of $61.50.

The recovery was supported by safe-haven demand and industrial buying, although investors remained cautious due to ongoing Middle East tensions and uncertainty surrounding the US interest-rate outlook.