Written by “Here we go again…”
Going against the recent rhetoric from President Trump, the Middle East conflict took a turn for the worse. Following the downing of an American Apache helicopter on Tuesday, US forces launched an overnight three-wave strike on Iranian targets, focusing mostly on military installations rather than oil ports and depots. Iran responded in a similar fashion by targeting US bases in Jordan, Kuwait and Bahrain. This turn of events did not surprise since, with negotiations stuck, military operations might be needed to unlock further progress.
However, the oil market did not get overly excited by these developments. The $4 jump in WTI oil prices, which was within the recent daily volatility levels, proved short-lived, as market participants judged that the latest hostilities do not mean a return to the pre-April 8 ceasefire period, with a peace deal remaining the main scenario. Talks between the US and Iran, through the usual proxies, are set to restart soon, with Trump’s Tuesday commentary about “winning the Iran war over the next two weeks” remaining valid.
Equities under pressure for a plethora of reasons
These renewed hostilities are not doing any favours to risk appetite. The Nasdaq 100 index had another weak session yesterday, adding to the broader weakness, with futures contracts pointing to another soft opening today, despite positive news from the SpaceX IPO being four times oversubscribed, which is an indicator of exceptional demand.
Notably, despite the small movements in dollar pairs and the relatively stable US Treasury yields, gold remains under severe pressure. It dropped to $4,172 earlier today – the lowest level since March 23, at the height of the US-Iran-Israel conflict – with most investors pinning down this continued selling pressure to countries selling their gold holdings to support their currencies and/or aiming to replenish their empty coffers after the dramatic drop in oil revenue.
US CPI in the spotlight
That said, the combination of weaker equities, weaker gold and stable Treasury yields – a 10-year note auction will take place later today – can also be explained by more hawkish Fed rate expectations following last Friday’s strong jobs data. Importantly, the crucial May CPI report will be released later today (12:30 GMT). Both headline and core indicators are forecast to accelerate to 4.2% and 2.9% year-on-year, potentially offering further confirmation of the impact of higher energy prices.
An upside surprise today will not only play a crucial role in next week’s meeting rhetoric, but, coupled with a stronger PPI report and a hawkish ECB meeting tomorrow, could bring forward the 25bps rate hike currently fully priced in for December 2026. The dollar is set to benefit from such a hawkish shift, potentially augmenting the current weak sentiment in both equity and gold markets.
BoC meets today; loonie to benefit from a hawkish stance
The Bank of Canada is expected to stand pat today, as the council is torn between weakening growth, and elevated oil prices. Last Friday’s labour market data was a positive surprise, but following the weaker April CPI report and the Q1 GDP figures, a hawkish tilt remains a low probability scenario, especially as the BoC’s mind is also on the USMCA review in July. The loonie is in desperate need of a boost as it has been consistently weakening against the US dollar since May 1, with dollar/loonie climbing 3% in just 40 calendar days.
Dollar/yen trades near April 30 levels
The clock is ticking down to the next intervention from the BoJ. Today’s US CPI report, apart from its impact on Fed expectations, could prove to be the straw that broke the camel’s back, as a sizeable inflation acceleration might leave little choice to Japanese Finance Ministry officials but to authorize another intervention. The key question is whether this likely intervention will push dollar/yen towards 150 or whether it will prove a repeat of the April 30 movement.
By XM.com
