Ongoing Israel-Iran tensions to keep risk sentiment in checkUS core PCE and consumption data to offer much-needed distractionCPI readings also due in Canada, Australia and JapanFlash PMIs for June in the spotlight too amid tariff chaosUS Data Eyed Amid Doubts About Economy And GeopoliticsThere’s been some good news and bad news for the US economy lately, as investors attempt to gauge the impact of President Trump’s tariff war. The good news is that so far, there’s been very little pressure on consumer prices from the universal 10% tariff rate that applies on most goods entering the United States. The labour market is also proving to be a lot more resilient than anticipated.The bad news is that American consumers appear to be turning more cautious with their spending, and although the economy is still churning out new jobs, there could be some major cracks forming under the surface.Friday’s data on PCE inflation and personal income and spending will therefore be crucial, as it will shed more light on both price pressures and the strength of consumer demand.Personal consumption moderated to 0.2% m/m in April but is expected to have quickened slightly in May to 0.3% m/m. However, personal income growth likely halved to 0.4% m/m. As for the Fed’s favourite inflation metrics, the PCE price indices are not anticipated to alarm investors but may point to a small pickup on the back of the higher tariffs coming into effect in April.The headline rate of the PCE price index is projected to rise from 2.1% to 2.25% y/y according to the Cleveland Fed’s Nowcast model, while the core PCE price index is estimated to edge up slightly from 2.5% to 2.58% y/y.Which Way Will Fed Rate Cut Expectations Sway?Ahead of all that, the focal point at the start of the week will be the flash S&P Global PMIs for June, which will be watched for any signs that the still raging trade war is hurting business activity. Also due on Monday are pending home sales for May.The Conference Board’s latest consumer confidence index is out on Tuesday, followed by new home sales on Wednesday. There will be more housing data on Thursday with pending home sales, as well as durable goods orders and the final estimate of Q1 GDP growth. The reaction in Fed fund futures, which will set the tone for the US dollar and on Wall Street, will be determined by the extent to which any downside surprises are offset by upside ones, with extra weighting given to the core PCE print.However, investors will also be paying attention to Fed Chair Powell’s two-day semi-annual testimony before Congress on Tuesday and Wednesday for any fresh clues on the policy outlook.Market expectations for Fed rate cuts continue to pivot around 50 basis points of reductions by year-end. Any hawkish remarks by Powell or indications that the higher levies are starting to feed into consumer prices could push those odds much lower, likely lifting the dollar but sparking a selloff in US equities.Risk of US Being Dragged Into Israel-Iran ConflictComplicating matters, however, is the recent escalation in the Middle East, with neither Israel nor Iran appearing ready to back down in the week-long exchange of missiles. Although outside of energy markets, investors’ response has been somewhat muted, the biggest worry now is that the United States might enter the conflict. There is intense speculation that Washington and Tel Aviv want to wipe out Iran’s nuclear capabilities, risking triggering a wider regional war.Any further escalation could extend oil’s and the dollar’s latest rebounds, and the safe-haven gold might even join the rally too. But risk assets, particularly stocks, could come under pressure. The only relief for Wall Street in such a scenario would be the announcement of a new trade deal between the US and one of its main trading partners such as India or Japan.Euro’s Setback Likely To Be TemporaryThe euro has been a surprise beneficiary of the trade war, as Trump’s dangerous rhetoric has been seen as damaging to America’s standing in the world, with investors questioning whether the country remains a safe and attractive place to do business in. However, the flare-up in the Middle East has exposed Europe’s vulnerability to fluctuations in energy prices. And it’s not just about oil, as gas prices have also been rising since the conflict started – Iran is the world’s third-largest producer of natural gas.But barring a much more severe crisis, the euro’s prospects are looking up in the bigger picture as the European Central Bank’s easing cycle is coming to an end while the Fed’s has paused less than halfway through. Moreover, Eurozone growth has been unexpectedly robust in the first few months of 2025, and so should Monday’s flash PMI numbers continue to suggest that the economy took only a minor hit from the trade war, the euro might recoup some of its recent pullback.Investors will also be keeping an eye on the Ifo business climate index due out of Germany on Tuesday.Pound Underperforms Amid Geopolitical RisksAcross the channel, the flash PMIs will also be the only highlight in the UK. Like the euro area, the British economy had a strong first quarter. Additionally, the UK has signed a trade deal with India, agreed on an improved post-Brexit deal with the EU, and is the first country to reach a trade pact with President Trump.All this underpins sterling’s uptrend that started in mid-January but is now being tested by the heightened geopolitical and trade uncertainty.The UK’s twin deficit problem leaves the pound much more exposed to market volatility than some of its peers like the euro, regardless of the UK’s otherwise sound economic fundamentals.Hence, even if Monday’s PMI readings show a further recovery in June from the April dip, gains are likely to be limited as long as safety flows are headed in the dollar’s direction away from riskier bets.Will Canadian CPI Add to BoC’s Worries?Despite some reports that the US and Canada are close to agreeing on a deal that would permanently keep tariffs between the two countries low, there has yet to be any announcement. A deal would clear a lot of the fog over the outlook for the Bank of Canada, as it tries to navigate the downside risks to growth and a buildup of price pressures.Underlying inflation has been steadily rising in Canada this year, with some measures exceeding 3.0%. The latest CPI figures are due on Tuesday and will be watched closely for signs that core inflation has started to ease.If there’s no improvement in the May data, investors will likely further scale back their expectations of a 25-bps rate cut at the July meeting, which currently stand at just over 20%. This could help the Canadian dollar to get back on the front foot against the US dollar, which saw its safe-haven status being restored from the tensions in the Middle East.Other Canadian data will include the monthly GDP print on Friday.