Written by Middle East conflict in the spotlight again
The Iranian attack on oil ships in the Strait of Hormuz yesterday morning did not go unanswered by US forces. A series of strikes were launched against Iran, triggering a rise in oil prices. WTI spot oil climbed above $73, while the December 2026 WTI oil futures contract is trading, at the time of writing, slightly above $71, essentially erasing the decline of the past two weeks.
Lately, it has been evident that there was little traction between the US and Iran on agreeing to the Strait of Hormuz mechanism and moving on to more contentious topics like Iran’s nuclear intentions. More notably, these recent flare-ups originated mostly from the Iranian side, as the internal battle between hardliners and more moderate officials continues. The latest escalation could also be attributed to the public procession of former Supreme Leader Ali Khamenei, which drew millions onto the streets. He is scheduled to be buried on July 9, thus keeping the door open to fresh hostilities, and further oil price upside.
Hiking appetite is not over
The RBNZ, which will move to eight meetings from 2027, matching major central banks, confirmed strong expectations for a 25bps rate hike, pushing the official cash rate to 2.5%. The main arguments for the hike were to limit the recent cost prices passthrough to prices, and to prevent an unwarranted further easing in financial conditions, with the Committee potentially influenced by the latest US-Iran shenanigans and the higher oil prices.
The kiwi jumped higher and, at the time of writing, is the best-performing currency of the day, as Governor Breman kept further rate hikes on the table, with the usual caveat that the timing of these additional moves depends on inflation and the economy’s spare capacity. She also stated that the current OCR level remains accommodative since it is currently at the lower end of the estimated neutral rate range of 2.5%-3.5%.
The RBNZ decision per se is unlikely to have a market impact beyond the kiwi, but it suggests that some central banks – especially the ECB – could see beyond the aggressive oil prices drop and actually consider hiking at their July meeting to effectively reduce the chances of second-round effects. Is the Fed also going to consider a July 30 hike?
Today’s FOMC minutes release from the June 17 meeting and next week’s Fed Chair Warsh testimony before Congress could fill in many of the current gaps, with the last missing piece of the puzzle being Fedspeak, which continues to be exceptionally light, especially from the more hawkish FOMC members. Markets are currently assigning an 80% probability to a September rate hike.
Risk appetite slides
The US-Iran developments appear to have further dented risk appetite after yesterday’s difficult US session. This persistent weakness in equities stems from the US technology sector ahead of the next earnings round, which commences later this week. With the bellwether KOSPI index dropping to the lowest point since mid-May and the newsflow from the Middle East potentially remaining war-like, risk sentiment could remain on the back foot during today’s session.
Amidst these developments both euro/pound and dollar/yen are in the spotlight, with the former stabilizing at a one-year low ahead of Burnham’s expected arrival at No. 10 Downing Street, and the latter completing a full month of trading above 160 without the Japanese authorities feeling the urge to intervene.
However, the asset to watch today will probably be euro/dollar. Persistent equity weakness and hawkish FOMC minutes today could prove a boon for the dollar, potentially erasing the last two-week climb in euro/dollar from 1.1324 to 1.1420.
By XM.com
