Here is what you need to know on Tuesday, July 7:

Markets turn cautious on Tuesday as investors pay close attention to headlines coming out of the Middle East amid a lack of high-impact data releases. In the second half of the day, United States (US) Goods Trade Balance data for May will be featured in the economic calendar, alongside the Automatic Data Processing's (ADP) Employment Change 4-week Average.

The US Dollar (USD) started the week on a firm footing and gathered strength against its major rivals in the first half of the day. The improving risk mood, as reflected by the bullish action seen in Wall Street, however, made it difficult for the USD to continue to outperform its rivals. In turn, the USD Index erased its gains to end the day flat. In the European morning on Tuesday, the index fluctuates at around 101.00.

Fed's Waller underscores flexible forward guidance and firm 2% inflation pledge

Federal Reserve (Fed) Governor Christopher Waller delivered a moderately stronger-than-usual performance on Monday, with a 7.1/10 FXS Speechtracker score compared to the established baseline of 6.4/10, emphasizing both the usefulness and the pitfalls of forward guidance.

The focus on forward guidance as a “valuable tool” that can accelerate policy transmission, yet become a hindrance when too rigid or when facing multiple plausible economic paths, signals a preference for flexibility and data dependence rather than pre-committing to a fixed policy path. Reinforcing the credibility of the 2% inflation pledge, rejecting the idea of keeping rates low to aid deficit financing, and favoring an inflation target range without changing the current goal all point to a stance that is structurally hawkish on inflation, even without explicit comments on the near-term outlook.

The FXS Fed Sentiment Index rose by 1.83 points to 125.72, firmly in hawkish territory and consistent with the speech’s emphasis on a clear reaction function and resistance to fiscal dominance.

Meanwhile, Iran’s Islamic Revolutionary Guard Corps (IRGC) reportedly attacked a commercial ship sailing the Near the Strait of Hormuz on Monday, and US President Donald Trump told reporters that the US would either reach a deal of "finish the job." After failing to make a decisive move in either direction on Monday, crude Oil prices edge higher early Tuesday, with the barrel of West Texas Intermediate (WTI) rising more than 1% on the day near $69.50.

EUR/USD fluctuates in a narrow band below 1.1450 after closing the day virtually unchanged on Monday.

ECB's Schnabel flags second-round risks, supporting a mildly hawkish Euro tone

European Central Bank (ECB) Executive Board member Isabel Schnabel's speech received a score of 7.6/10 on FXS Speechtracker on Monday, modestly above the 7.2/10 historic average, pointing to a slightly more forceful stance than usual. By stressing that the current shock “cannot simply be looked through” and is already generating indirect and potential second-round effects, the speech leans hawkish relative to Schnabel’s baseline.

The remark that the Euro area is “not in a pre-war situation even after the fall in oil prices” downplays the idea that lower energy costs alone will quickly tame inflation pressures. This combination of caution on second-round effects and reluctance to dismiss the shock supports expectations for the ECB to remain vigilant, limiting downside for the Euro and tempering aggressive rate-cut bets.

GBP/USD extended its rebound on Monday and reached its highest level since mid-June near 1.3400 in the Asian session on Tuesday. The pair corrects lower in the European morning and trades slightly below 1.3380. The Bank of England (BoE) will publish its Financial Stability Report later in the day.

USD/JPY gained more than 0.4% on Monday and closed above 162.00. The pair struggles to preserve its bullish momentum and moves sideways slightly below Monday's closing level.