During the early part of the European trading session, the US dollar retreated, supported by a safe-haven bid, as tensions escalate in the Middle East, while sterling retreated ahead of the Bank of England’s monetary policy meeting this week. Here is what is happening in the forex market today.

Dollar Rises Amid Middle East Tensions

The safe-haven dollar gained support on Monday after a deadly rocket attack over the weekend on the Israeli-occupied Golan Heights.

The attack, which left at least 12 people dead, was blamed by both Israel and the US on Hezbollah, backed by Iran, which denied responsibility.

Israel vowed to take retaliatory action against Hezbollah in Lebanon, and Israeli jets attacked targets in southern Lebanon on Sunday.

However, these developments are minor, and most attention is now focused on the Federal Reserve’s meeting next Wednesday.

Although the Fed is widely expected to leave rates unchanged this week, the expectation of a rate cut has increased, according to some market economists.

The primary factor bringing the FOMC closer to a cut is the positive inflation data for May and June. After firmer inflation figures in Q1, largely supported by residual seasonality and normal month-on-month movement, Q2 showed considerable improvement in inflation data.

Pound Falls, Rate Decision on Hold

In Europe, the GBP/USD fell 0.5% to 1.2809 ahead of the Bank of England meeting on Thursday.

The chances of the central bank starting a rate-cutting cycle later this week are seen as a toss-up, as policymakers have to balance higher-than-expected services price inflation with weak growth.

The EUR/USD fell 0.2% to 1.0836 on the likelihood that the European Central Bank will cut rates again this year, following the June cut.

Analysts are also pointing to the release of some first-tier eurozone data later in the week. Tomorrow’s second-quarter GDP report is expected to show year-on-year growth of 0.5%, but Wednesday’s preliminary CPI estimate is expected to have the biggest impact on the market. The latest Central Bank meeting has put a greater focus on data dependency.

BOJ Meeting Approaching

In Asia, USD/JPY was barely up at 153.75, approaching its lowest levels in nearly three months ahead of this week’s Bank of Japan meeting.

Market analysts disagree on whether the central bank will raise interest rates by about 10 basis points or leave them unchanged. The Bank of Japan will also provide more details on how it plans to begin tapering its asset purchases.

The USD/CNY was up about 0.1% at 7.2584 after speculation of government intervention sparked sharp swings in the yuan last week.