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Ongoing uncertainty around the developments in the Middle East continued to dominate market sentiment on Tuesday, supporting the dollar after a decline in the previous session. Treasury yields also remained on an uptrend, despite Monday's decline, as conflicting signals over the prospect of a diplomatic resolution kept markets on edge. Risk sentiment remained fragile, with the market swinging between hopes and concerns about the geopolitical situation.
 
The dollar and yields retreated after a potential path toward an end in the current tensions emerged after comments on the matter from US President Donald Trump. However, denial from the Iranian side diluted the impact and fuelled some confusion. In this regard, prolonged tensions and disruptions in the Middle East could continue to fuel inflation expectations and force central banks to adopt a more cautious approach.
 
Looking ahead, the trajectory of both the dollar and yields hinges on how the geopolitical situation develops. If tensions ease and energy supply routes are reopened, inflation fears could recede, allowing yields to pull back and the dollar to soften. Conversely, further escalations would likely sustain upward pressure on both.
 
On the macro front, today’s flash PMI and job market data could have some impact on the market. Forecasts point to a modest softening in manufacturing activity, and a reading that confirms slowing momentum would raise questions about whether the US economy can absorb both elevated rates and geopolitical headwinds simultaneously.

Daniel Takieddine is the Co-founder and CEO at Sky Links Capital Group.