The USD, which remains weak in the medium term, should get some respite on the escalating Israel-Iran conflict. The base case remains a case of continued hostility without full-scale war, though the risk of miscalculation is high. G7 leaders are gathering for a summit in Canada. However, the lack of a joint G7 communique underscored divisions between the EU’s desire for a unified front to push for a ceasefire vs. a unilateral pro-Israel US stance that did not favour US military intervention. Outside the G7, Russia and China backed Iran, condemned Israel’s strikes on Iran, and viewed the fractured West as incapable of providing collective leadership to maintain global order. The Red Seas, Straits of Hormuz, and Gulf oil infrastructure remained key chokepoints that could lift global oil prices.
Canada extended invitations to several key non-G7 countries – India, Australia, Brazil, Mexico, South Africa, and South Korea – to facilitate bilateral talks with the US to lay the foundation of future trade deals after the summit. However, the Mideast conflict will likely become a distraction that risks politicising trade, raising oil prices that hurt emerging markets with high energy import bills, highlighting the lack of US global leadership, and fuelling questions about aligning with the US-led trade framework. Brent crude oil prices rose another 2% to above USD75.80 per barrel this morning after last Friday’s 7% spike.
The FOMC meeting on 18 June will remain important. Although we see the Fed keeping rates unchanged at 4.50% for the fourth consecutive meeting, the futures market is hopeful of the Fed lowering rates in September. According to the New York Fed’s survey, inflation expectations declined across the 1-year, 3Y, and 5Y horizons. Tariffs did not lift US CPI inflation higher. Core inflation slowed to 0.1% MoM in May vs. the consensus for an increase of 0.3% from 0.2% in April. US President Donald Trump could inject volatility and hurt the USD by pressing the Fed to lower rates aggressively and making good on his threat to announce a dovish successor to Fed Chair Jerome Powell, whose term expires in May 2026. The DXY Index is caught between staying subdued in a 97.5-98.5 range on the Fed or returning into this month’s earlier 98.4-99.4 range on higher oil prices.
GBP/USD has a soft bias within its three-week range of 1.3450-1.3630 after failing to break decisively above 1.36. We expect the Bank of England to keep the bank rate unchanged at 4.50% at its June 19 meeting. But the monetary policy committee could signal another rate cut at the August meeting. On June 19, UK CPI inflation should ease to 3.5% YoY in May from 3.5% YoY in April, to 3.5% from 3.8% for core inflation, and to 4.8% from 4.8% for services inflation.
JPY and CHF to become less of a haven amid the Mideast crisis. On June 17, The Bank of Japan should affirm expectations for a delayed rate hike to 4Q25. On June 19, The Swiss National Bank should seize the opportunity to discourage the CHF’s haven appeal by cutting rates to 0% while leaving the door open for negative rates in 2H25. Against rising commodity prices, the AUD, NZD, and CAD could find support but find it hard to shake off global growth fears from a possible oil shock.
Quote of the Day
“Once you’ve been in space, you appreciate how small and fragile the Earth is.”
Valentina Tereshkova
June 16 in history
Russian Valentina Tereshkova was first woman in space in 1963 while Liu Yang was the first Chinese female astronaut in space 49 years later in 2012.
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