Israel threatens further action against Iran if necessary; Fed Beige Book warns inflation is hitting economic activity

Market Wrap-up: USD Strengthens as Oil Rally Fuels Inflation ConcernsThe DXY index continued its advance to 99.50 and is now approaching the key psychological resistance level of 100.00 as risk aversion intensified across financial markets during the previous session.

In an exclusive interview with CNBC, Israeli Prime Minister Benjamin Netanyahu stated that Israel and the United States are prepared to launch further strikes against Iran if necessary. The remarks added to existing geopolitical tensions following the renewed disagreements between Washington and Tehran earlier this week.

Energy markets remained firmly bid, with WTI crude oil rising nearly 2% to USD 96.60 per barrel. Global oil inventories continue to decline rapidly amid disruptions linked to the Strait of Hormuz, while seasonal fuel demand is expected to strengthen throughout the summer period.

According to multinational investment bank TD Securities, the oil market could lose an additional 1 billion barrels of crude production and 800 million barrels from inventories between June and November, even under the most optimistic scenario in which the Strait of Hormuz is fully reopened.

Meanwhile, the Federal Reserve's Beige Book released yesterday showed that economic activity continued to expand across most US regions, although inflationary pressures are increasingly affecting consumer spending patterns.

Spending trends are becoming more polarized across income groups, with low and middle income households facing greater pressure from rising prices and tightening budgets.

In addition, the latest ISM Services PMI exceeded market expectations, rising to 54.5 from 53.6 in April. May ADP Nonfarm Employment data also delivered a positive surprise.

Persistent concerns over inflation, a resilient labor market, and continued economic strength have reduced expectations for near term monetary easing, giving the Federal Reserve greater room to maintain current interest rates and potentially consider another rate increase later this year.

These developments pushed gold prices sharply lower below the 4,450 level during the previous session. At the same time, the S&P 500 snapped its nine session winning streak, while the Dow Jones Industrial Average fell by 600 points.

Looking ahead for today, traders will focus on Unemployment Claims and Revised Nonfarm Productivity data ahead of tomorrow's official Nonfarm Payrolls release. Comments from FOMC members will also be closely monitored for additional policy signals.

XAU/USD: Gold Under Pressure as Markets Price Higher Interest Rates

Key takeaway:

Gold prices declined on June 3 as markets increasingly priced in the risk that Middle East-driven energy inflation could keep interest rates elevated for longer. Investors also remained focused on developments in the region while awaiting a fresh round of key economic data releases.

The May ADP employment report delivered stronger-than-expected results, while activity in the services sector continued to expand.

At the same time, a stronger US dollar made USD-denominated precious metals more expensive for holders of other currencies, adding further pressure to gold prices.

Technical Outlook:

Daily Bias: Bearish

Support: 4,417

Resistance: 4,497

WTI: Oil Surges on Middle East Risks and Supply Tightness

Key takeaway:

Oil prices advanced on June 3 after Israeli Prime Minister Benjamin Netanyahu told CNBC that Israel and the United States are prepared to launch further attacks on Iran if necessary.

Global oil inventories continue to decline rapidly amid disruptions linked to the Strait of Hormuz, while fuel demand is expected to strengthen during the summer season.

According to TD Securities, the oil market could lose an additional 1 billion barrels of crude production and 800 million barrels from inventories between June and November, even under the most optimistic scenario where the Strait of Hormuz is fully reopened.

Technical Outlook:

Daily Bias: Bullish

Support: 93.30

Resistance: 97.29

DXY: Dollar Index Approaches 100 on Hawkish Fed Repricing

Key takeaway:

The US dollar has gained fresh momentum since the beginning of June, supported by persistent uncertainty surrounding the Middle East crisis and ongoing geopolitical developments involving Washington.

The Fed's Beige Book showed that economic activity continued to expand across most regions of the United States, although inflationary pressures are increasingly affecting consumer behavior.

According to the CME FedWatch Tool, markets currently expect the Federal Reserve to raise interest rates by at least 25 basis points before the end of the year.

Technical Outlook:

Daily Bias: Bullish

Support: 99.20

Resistance: 99.70

EUR/USD: Euro Rebounds but Upside Remains Limited

Key takeaway:

The euro rebounded from weekly lows against the US dollar. However, upside momentum remains limited amid continued uncertainty surrounding US-Iran negotiations.

Meanwhile, the Eurozone HCOB Composite PMI was revised higher to 48.5 in May, above both the preliminary estimate and market expectation of 47.5.

Germany's Composite PMI also improved to 48.8 from the preliminary estimate of 48.6.

Furthermore, expectations for a 25-basis-point rate increase by the European Central Bank later this month continue to provide support for the common currency and spot prices.

Technical Outlook:

Daily Bias: Bearish

Support: 1.15861

Resistance: 1.16226

USD/JPY: Yen Weakens as US Dollar Maintains Momentum

Key takeaway:

The Japanese yen weakened as the US dollar remained supported by stronger than expected economic data from the United States.

Makoto Noji, strategist at SMBC Nikko, warned on Tuesday that Japan faces the risk of a historic yen collapse due to prolonged oil price volatility and continued fiscal expansion.

To address these risks, Noji called on policymakers to implement a coordinated three-pronged strategy consisting of higher interest rates, an end to fiscal expansion, and additional market intervention measures.

Technical Outlook:

Daily Bias: Bullish

Support: 159.90

Resistance: 160.10

Overall, the market narrative has shifted back toward inflation and interest rates. Rising oil prices linked to Middle East tensions are adding a new layer of inflation risk, while stronger than expected US data suggests the economy remains resilient despite restrictive monetary conditions.

As a result, the US dollar continues to outperform, while gold and equities face headwinds from the prospect of tighter financial conditions for longer. Markets are now reassessing how much room the Fed has to keep rates elevated, rather than when the first rate cut might arrive.

The next major test comes from US labor market data. A strong Nonfarm Payrolls report would reinforce the recent repricing in Fed expectations, while any signs of slowing employment could challenge the dollar's latest advance.

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