The escalation of the conflict surrounding Iran and renewed retaliatory strikes in the Middle East became the key factors shaping market sentiment this week. A sharp spike in energy prices brought inflation fears back to the forefront, forcing investors to reassess the upcoming moves of major central banks.
Below is a summary of the primary economic outcomes and key asset performances over the past few days.
The regional conflict in the Middle East flared up with renewed intensity following US strikes on Iranian facilities and retaliatory attacks by Tehran on American bases. The collapse of the temporary peace agreement has triggered threats of a blockade in the Strait of Hormuz. In light of this, Brent crude prices surged by approximately 17% over the last two weeks, threatening the global economy with a fresh wave of inflation.
Inflation minimum: Annual price growth in the Eurozone slowed to 2.8%, which is the lowest mark since February, while core inflation dipped to 2.4%. Despite this positive trend, these indicators still sit above the ECB’s 2.0% target.
Euro performance: The EUR/USD pair stabilized around the 1.145 mark, holding ground near its local highs. Expectations that the regulator will hold off on any policy changes in July but resume rate hikes in September continue to support the European currency.
Political landscape: Investors reacted positively to the confirmation of Andy Burnham as the leader of the Labour Party, anticipating a disciplined and balanced fiscal policy from his cabinet.
Economic growth: The UK’s GDP edged up by 0.1% in May, while the three-month growth figure (+0.7%) beat analysts' expectations. Against this backdrop, the pound corrected to $1.346 but retains potential for weekly gains, as traders actively price in a Bank of England monetary tightening in November.
Pressure on the yen: The USD/JPY pair climbed toward 162.5, marking its weakest levels in forty years. The lack of emergency intervention or steps from Tokyo and domestic pension funds disappointed yen buyers.
Energy vulnerability: As a major importer of Middle Eastern crude, Japan remains highly sensitive to the escalation around Iran, stripping the yen of any immediate chance for a swift recovery.
Aussie under pressure: The Australian dollar slipped below 0.70 as geopolitical tensions overshadowed broad weakness in the US dollar. Investors currently price the probability of a Reserve Bank of Australia rate hike in August at just 20%.
Kiwi strength: The New Zealand dollar consolidated near a six-week high around $0.583. The RBNZ is signaling its readiness to maintain a hawkish stance, with markets projecting the official cash rate (OCR) to rise to at least 3.0% by the end of the year due to renewed inflation risks.
Softening macro data: The US Dollar Index (DXY) hovered near 100.7, on track for a weekly decline. Consumer prices in the US registered their first monthly drop since 2020, while producer prices surprised with an unexpected decline, significantly cooling the Fed’s hawkish rhetoric.
Labor market: Initial jobless claims fell to 208 000. That said, uncertainty surrounding the rate path in September is keeping market participants from making aggressive bets.
Toll on safe-haven assets: Rising yields amid persistent, long-term inflation risks stripped precious metals of their previous appeal.
Dynamic: Gold is closing the week with losses of over 3%, dropping below the key psychological level of $4 000 per ounce. Silver slipped by more than 7%, remaining under pressure below the $56 mark.
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