EUR/USD depreciated intra-day from 1.1556 to a low of 1.1503 despite the European Central Bank’s hawkish tone following its rate hike. Why? First, the 25-bps increase in the deposit facility rate to 2.25% was already fully priced by forward guidance from ECB officials. ECB President Christine deliberately avoided committing to a sequence of hikes and anchored the governing council’s data-dependent, meeting-by-meeting approach. Second, the Eurosystem staff projections painted a stark stagflationary picture. Between June and March, the 2026 projection for HICP inflation was revised up to 3% from 2.6%, while the GDP growth projection was modestly lowered to 0.8% from 0.9%. Third, markets see the USD supported ahead of next week’s FOMC meeting, following stronger US nonfarm payrolls and higher CPI inflation. The EUR could not shake off the USD’s haven bid driven by President Donald Trump’s initial threat to launch airstrikes on Iran.
EUR/USD subsequently rebounded to the session’s high of 1.1590 after President Trump cancelled the airstrikes amid another claim that a peace deal was imminent with Iran. Brent crude oil prices plunged from the day’s open around $95 per barrel to a two-month low of around $89. Interestingly, Brent has been on the retreat after failing to break above $120 at the end of April, around the time the UAE officially announced its historic departure from OPEC and OPEC+. US Treasury Secretary Scott Bessent followed through on his argument that the energy-related inflation pickup would be transitory because oil prices would decline quickly due to oversupply once Washington and Tehran reach an agreement to reopen the Strait of Hormuz, a view he shared with newly confirmed Fed Chair Kevin Warsh at breakfast on May 28. Fitch Ratings also published a comprehensive report on Monday, stating that the current oil price spike was a temporary logistical supply shock rather than a permanent loss of global production capacity, and forecasting that Brent would drop to $70 by September.
The lesson from Thursday’s price action was that geopolitical tail risks, and the unwinding of those risks, could also override near-term monetary policy and economic fundamentals. The sensitivity to the sudden unwinding of the geopolitical crude premium will become more evident if USD/JPY pulls below 160 into and after next week’s anticipated increase in the Bank of Japan policy rate to 1%. Neutralising the DXY’s push above 100 also helped pull USD/CAD and USD/CHF below 1.40 and 0.80 again, and support EUR/USD and GBP/USD at 1.15 and 1.33 too. If Brent succeeds in holding below $90 and its 100-day moving average, next week’s FOMC meeting may be more about ending the easing bias in favour of a hawkish pause rather than opening the door for rate hikes. Warsh will likely prioritize internal structural reforms over rate projections by reducing forward guidance through the dot plot, cutting back excessive public speeches by Fed officials, and maybe limiting post-FOMC press conferences.
Quote of the day
“I like the dreams of the future better than the history of the past.”
Thomas Jefferson
June 12 in history
In 2018, Singapore hosted a historic meeting between the US President Donald Trump and North Korean leader, DPRK Chairman Kim Jong Un.
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