Middle East War Broadening Increasing Defensive Flows

OVERVIEW :

Friday, July 17th, 26’ Markets stayed focused on the US-Iran conflict, with the US carrying out a sixth consecutive night of strikes. Iran said power facilities, bridges and civilian infrastructure were hit, while warning that if the US continues targeting Iranian infrastructure, all infrastructure across the region becomes a legitimate target. Tehran also warned that either every country in the region will be able to export oil, or no one will, keeping concerns around the Strait of Hormuz and Bab el-Mandeb firmly in focus. The headlines kept a geopolitical risk premium in crude prices and weighed on broader risk sentiment. Equities finished lower, led by weakness in technology and AI names, while energy stocks outperformed as oil climbed to one-month highs. Markets now head into the weekend focused almost entirely on whether the conflict escalates further.

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US DOLLAR

USD stayed supported as geopolitical tensions continued to drive safe-haven demand. A sixth straight night of US strikes on Iran, alongside fresh Iranian threats towards regional oil infrastructure, kept markets defensive and helped underpin the Dollar despite mixed US data. Fed speakers also leaned hawkish, with Jefferson saying policy is well positioned but could need to be reconsidered if inflation doesn't continue easing, while Logan repeated that a modestly higher policy rate would provide a better balance of risks. On the data front, import prices unexpectedly rose, adding to inflation concerns, while consumer sentiment improved more than expected and housing starts beat forecasts, helping keep the Fed's higher-for-longer narrative intact.

Data:

  • US Industrial Production MoM (Jun) M/M 0.1% vs. Exp. 0.2% (Prev. 0.1%, Low. -0.1%, High. 0.5%).
  • US Manufacturing Production YoY (Jun) Y/Y 1.1% (Prev. 1.4%).
  • US Industrial Production YoY (Jun) Y/Y 1.1% (Prev. 1.7%).
  • US Manufacturing Production MoM (Jun) M/M 0.0% vs. Exp. 0.1% (Prev. 0%, Low. -0.1%, High. 1.0%).
  • US Housing Starts (Jun) 1.427M vs. Exp. 1.33M (Prev. 1.177M).
  • US Import Prices MoM (Jun) M/M 0.3% vs. Exp. -0.7% (Prev. 1.9%, Low. -2.0%, High. 0.1%).
  • US Export Prices MoM (Jun) M/M -0.6% vs. Exp. -0.4% (Prev. 1.3%, Low. -1.0%, High. 0.8%).
  • US Housing Starts MoM (Jun) M/M 19.0% (Prev. -15.4%).


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EURO

EUR had a mixed session but ended broadly flat. Eurozone inflation came in as expected, with headline CPI slowing to 2.8% Y/Y and core easing to 2.4%, although markets continue to see inflation risks from higher energy prices and ongoing geopolitical tensions. ECB pricing remained relatively firm compared to the Fed, helping limit downside in the Euro. On the data side, the current account unexpectedly slipped into a €6.2B deficit, but it had little impact on price action as markets stayed focused on the broader macro and geopolitical backdrop.

Data:

  • EU Core Inflation Rate YoY Final (Jun) Y/Y 2.4% vs. Exp. 2.4% (Prev. 2.6%).
  • EU Inflation Rate MoM Final (Jun) M/M -0.1% vs. Exp. -0.1% (Prev. 0.1%, Low. -0.1%, High. -0.1%).
  • EU Inflation Rate YoY Final (Jun) Y/Y 2.8% vs. Exp. 2.8% (Prev. 3.2%, Low. 2.8%, High. 2.9%).
  • EU Current Account (May) -6.2B (Prev. 14.9B).


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GREAT BRITISH POUND

GBP stayed on the weaker side and gave back some of the gains made earlier in the week. There wasn't much in the way of economic data, with politics remaining the main focus. Markets continued to wait for Andy Burnham's official appointment as Prime Minister, with uncertainty around cabinet picks and the broader policy direction keeping Sterling on the back foot.

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AUSTRALIAN DOLLAR

AUD was the weakest performer for most of the day as the risk-off backdrop and stronger oil prices weighed on the higher-beta currencies. The Aussie found some demand during the US session as selling pressure eased, but it still finished as one of the weaker G10 performers, with broader sentiment remaining the main driver.

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CANADIAN DOLLAR

CAD outperformed as the rally in crude prices continued to support the Loonie. The stronger oil backdrop easily outweighed the political headlines after President Trump threatened new tariffs on Canada over wildfire smoke, with markets largely ignoring the comments. Overall, CAD remained one of the better performers on the day as energy prices stayed firmly bid.

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NEW ZEALAND DOLLAR

NZD saw mixed flows as rising geopolitical tensions weighed on risk sentiment, but it still managed to finish the day higher. The Kiwi remained supported by the RBNZ's hawkish outlook, with markets still pricing around 52bps of additional tightening by year-end, the most among major central banks. That continued to provide a solid base for NZD despite the more cautious market backdrop.
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JAPANESE YEN

JPY had a mixed session and ultimately finished little changed. The Yen didn't see much of the safe-haven demand despite the geopolitical backdrop, with most defensive flows favouring CHF instead. On the domestic side, the BoJ continued to signal there is little need for consecutive rate hikes, although officials suggested growth forecasts could be revised higher on the back of AI-related investment. Overall, the comments had little impact on the Yen, with broader market sentiment remaining the main driver.

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SWISS FRANC

CHF stayed firm throughout the day as it attracted safe-haven demand amid the ongoing US-Iran tensions. Unlike the Yen, the Franc saw stronger defensive inflows as markets turned more cautious heading into the weekend. With no major domestic headlines, CHF was driven almost entirely by the geopolitical backdrop and broader risk sentiment.