Access Restricted

* Dollar and safe havens outperform while GBP struggles 

* Brent crude surges over 5%but remains below Monday’s high

* Trump leaves G7 meeting abruptly, citing the situation in the Middle East

* Dollar quiet, Antipodeans strong as risk sentiment improves

FX: USD was supported by a ratcheting up of tensions in the Middle East as President Trump left the G7 meeting early and sent ominous messages about potential imminent US (military) action. Higher oil prices, with Brent jumping over 5%, also helped the greenback, due to the fact that the US has turned from a net energy importer to a net exporter. Prices are still very much in a downtrend on the Dollar Index and would need to get above 99.57 and then 102 to really make the bears concerned. US retail sales were solid on the control group figure which feeds into GDP data.

EUR fell through the day as the dollar strengthened. There is little progress on the EU-US trade deal front with the July 9 deadline getting closer. That said, Treasury Secretary Bessent has said this date can be extended if parties are negotiating in good faith. Stronger than expected German ZEW investor sentiment figures were released with no meaningful market reaction. Geopolitical tensions present a modest downside risk to the cyclical euro, while higher oil prices could be a risk to price stability so may not bring the next rate cut forward to October.

GBP was the worst performing major currency versus the dollar with cable dipping below the prior cycle top at 1.3434. We get CPI and then the BoE meeting over the next 48 hours or so. A neutral/dovish bias from the MPC is predicted with traders adding to rate cut bets in recent weeks. The 50-day SMA sits at 1.3363 as next support.

USD/JPY rose again for a third day though the yen outperformed is major peers. PM Ishiba and President Trump failed to reach a tariff agreement. The BoJ kept rates steady and saw hawkish dissent from one official. Yen strength faded during Governor Ueda’s press conference as he judged downside risks were bigger for the economy and prices.

AUD fell back as resistance at 0.6549, the major Fib retrace level (61.8%) of the September to April decline again worked well. Labour market data will be watched on Thursday. CAD softened with the major going higher for the first in six days. The G7 meeting in Canada saw President Trump and PM Carney on cordial terms, with a trade deal still said to be possible, even though they had differing ‘concepts’ on trade.  

US stocks: The S&P 500 lost 0.84% to settle at 5,982. The Nasdaq closed down 1.00% at 21,719. The Dow Jones finished lower at 42,216, losing 0.70%. Energy was the only sector in the green, adding over 1%, while Healthcare and Consumer Discretionary lost more than 1%. The Trump administration is reportedly to consider a crackdown on pharma ads, according to Bloomberg. The headline US retail sales figure dipped again as the momentum from activity ahead of tariffs which had boosted spending in April too, looked to have run its course. The S&P 500 remains just 2.6% off its record close of 6,144.

Asian stocks: Futures are mixed. Asian markets were mostly lower as markets contended with mixed comments from President Trump regarding the Middle East. The ASX 200 traded marginally softer and in a narrow range, with upside in gold miners cushioning losses. The Nikkei 225 was kept afloat amid the softer JPY after the US and Japan failed to reach an agreement. The index saw a modest hawkish reaction to the BoJ decision which reduced the pace of JGB purchases as predicted. The Hang Seng and Shanghai Comp eased lower amid the cautious risk mood.

Gold printed a doji as focus remained on the Middle East, US economic data, and the timing of the next US interest rate cut. The Fed’s patient stance could mean more rangebound trading unless the Israel-Iran conflict really escalates.

Day Ahead – UK CPI, FOMC Meeting

Consensus forecast the headline UK CPI rate easing back to 3.3% from 3.5% after the unwelcome surprise in April, though that was due to Easter’s timing and an ONS overestimation in road tax. The latter should bring down services inflation quite sharply, from a likely peak of 5.4%. The core print is expected to rise 3.5%, three-tenths lower than the prior April reading. We have the BoE meeting on Thursday with no rate change predicted and also no quarterly monetary policy report.

The Fed will keep hold rates steady at its meeting whilst mostly maintaining existing signals about policy. Officials remain in wait-and-see mode as they study how their dual mandate fares amid trade uncertainty. Key focus for markets will be the release of the updated economic forecasts and dot plot. The most recent median dot in March predicted two 25bps rates cuts in both 2025 and 2026. This remains roughly in line with current market pricing, so it seems probable that officials will stick with this. However, the hawkish risk is that rate cuts are delayed so the median dot points to just one quarter-point move this year and 75bps next year. Projections for PCE inflation are likely to be raised near-term and GDP lowered which suggests stagflation.

Chart of the Day – Nasdaq still consolidating just below highs

The tech-heavy Nasdaq stock index has propelled itself very close to record highs above 22,000 after crashing below 17,000 after Liberation Day in early April. Prices have stuttered though above that key psychological round number with stocks rebounding after last Friday’s sell-off and the initial news about the Israel-Iran conflict. Yesterday’s sell-off still leaves the index above Friday’s low at 21,591. Fed Chair Powell is likely to emphasise current heightened uncertainty, due to both geopolitical and tariff events.

We note that energy market volatility could be an argument for Fed officials and Chair Powell to fend off President Trump and his calls for interest rate cuts, as it gives the Fed more reason to assess the impact from both those geopolitical concerns and tariffs on the economic outlook. We have the Nasdaq record top at 22,222 with initial support around 21,500 and then 21,000.