The U.S. dollar may continue to weaken if the conflict in the Middle East remains limited in scope and expectations for higher U.S. interest rates continue to decline.

The U.S. Consumer Price Index (CPI) data released on Tuesday confirmed that inflation slowed in June compared with May, as expected. Moreover, the figures came in noticeably below both market forecasts and the consensus estimates.

According to the report, annual headline CPI slowed from 4.2% to 3.5%, compared with expectations of 3.8%. On a monthly basis, June CPI fell by 0.4%, marking a deflationary reading and exceeding expectations for a 0.1% decline. Annual core CPI eased from 2.9% to 2.6%, below the consensus forecast of 2.8%, while monthly core CPI was unchanged, compared with expectations that it would remain at 0.2%.

Unsurprisingly, these figures placed significant pressure on the U.S. dollar despite the renewed escalation of tensions in the Middle East. Under normal circumstances, such geopolitical developments support demand for the dollar as a safe-haven currency, strengthening its position.

Equity markets also benefited from the weaker inflation data, with U.S. stocks leading the gains as investors scaled back expectations of further Federal Reserve interest rate hikes later this year. The decline in U.S. Treasury yields following the inflation report also contributed to dollar weakness and improved sentiment toward equities.

What to Expect in the Markets Today

The dollar's decline has paused for now as investors await the release of the U.S. Producer Price Index (PPI). The report is expected to confirm the disinflationary trend indicated by the CPI data. I expect the U.S. dollar to weaken further against the major currencies in the near term. Despite the current pause, the gradual decline of the dollar in the Forex market is likely to continue.

Forecast of the Day

AUD/USD

The pair is trading slightly above the 0.6990 support level. Consolidation above this level could pave the way for a move toward 0.7070. A break above 0.7003 may be considered a potential buying signal.

NZD/USD

The pair is trading below the 0.5825 resistance level. A confirmed breakout above this level could open the way for a rise toward 0.5875. A move above 0.5829 may be considered a potential buying signal.