Demand for the US dollar has surged sharply, leading to a significant sell-off in risky assets. The British pound has been particularly affected.

Rising US inflation, driven by the escalation of the conflict in Iran, has become a catalyst for heightened expectations about the Federal Reserve's future actions. Traders are increasingly leaning towards the view that the Fed will maintain high interest rates for a longer period, with some even considering the possibility of further hikes by the end of the current year. This outlook has already had a significant impact on currency markets, leading to the strengthening of the US dollar yesterday.

In the current conditions, as geopolitical tensions in the Middle East continue to rise and inflationary pressures in the US economy accelerate, the central bank's wait-and-see stance becomes increasingly justified. Interest rate hikes, which have been increasingly discussed by Fed officials, are a traditional tool for combating inflation but can slow economic growth.

As noted earlier, the British pound has taken a hit amid political uncertainty. Rumors of a potential leadership challenge within the Labor Party from Andy Burnham have negatively impacted financial markets. These events raise doubts not only about the stability of the current government but also about its ability to manage the public debt, which is under close scrutiny. The news of a potential leadership rivalry between Starmer and Burnham, who has significant support, immediately affected the pound's exchange rate.

Today, the economic calendar is expected to be calm in the first half of the day. However, the scheduled reports could impact markets, particularly in Europe. The main focus will be on the data from Italy and the analytical review from the European Central Bank. The inflation indicator is fundamental for assessing inflationary processes in the country and reflects the dynamics of prices for consumer goods and services. The Italian CPI figures can provide insight into the level of inflationary pressure in the third-largest economy in the eurozone, which, in turn, could adjust expectations regarding the monetary policy of both the Bank of Italy and the ECB as a whole.

Alongside the Italian data, the ECB's economic bulletin is expected to be released. This document contains a detailed analysis of the current economic situation in the eurozone, risk assessments and outlooks, and comments on monetary policy.

Regarding the pound, the absence of significant macroeconomic data from the UK in the first half of today could provide GBP/USD with a temporary respite from recent pressures. Against the backdrop of internal political uncertainties caused by a potential challenge to the Prime Minister's leadership, the lack of new statistical signals from the island could contribute to some stabilization, allowing the market to digest previous news and assess its long-term consequences.

If the data aligns with economists' expectations, it would be best to act based on the Mean Reversion strategy. If the data is significantly above or below economists' expectations, using the Momentum strategy would be the best approach.

Momentum Strategy (Breakout):

For the EUR/USD pair:

• Long positions on a breakout of the level 1.1657 may lead to an increase in the euro to the areas of 1.1678 and 1.1701.
• Short positions on a breakout of the level 1.1633 may lead to a decline in the euro to the areas of 1.1613 and 1.1592.

For the GBP/USD pair:

• Longs on a breakout of the level 1.3381 may lead to an increase in the pound to the areas of 1.3416 and 1.3455.
• Shorts on a breakout of the level 1.3340 may lead to a decline in the pound to the areas of 1.3315 and 1.3283.

For the USD/JPY pair:

• Longs on a breakout of the level 158.65 may lead to an increase in the dollar to the areas of 159.00 and 159.29.
• Shorts on a breakout of the level 158.40 may lead to a sell-off of the dollar to the areas of 158.20 and 157.96.

Mean Reversion Strategy (Pullback):

For the EUR/USD pair:

• Shorts will be sought after an unsuccessful breakout above 1.1663 on a return below this level.
• Longs will be sought after an unsuccessful breakout above 1.1636 on a return to this level.

For the GBP/USD pair:

• Shorts will be sought after an unsuccessful breakout above 1.3393 on a return below this level.
• Longs will be sought after an unsuccessful breakout above 1.3340 on a return to this level.

For the AUD/USD pair:

• Shorts will be sought after an unsuccessful breakout above 0.7194 on a return below this level.
• Longs will be sought after an unsuccessful breakout above 0.7154 on a return to this level.

For the USD/CAD pair:

• Shorts will be sought after an unsuccessful breakout above 1.3757 on a return below this level.
• Longs will be sought after an unsuccessful breakout above 1.3725 on a return to this level.