OVERVIEW : Tuesday, July 21st, 26’
Markets remained dominated by the escalating US-Iran conflict, with investors balancing hopes for diplomacy against a steady stream of increasingly hawkish rhetoric from Washington. Early in the session, reports that Iran had proposed a 10-day ceasefire and that discussions around restoring limited navigation through the Strait of Hormuz were underway briefly improved sentiment and weighed on crude prices. However, the tone shifted later after multiple reports suggested the US is preparing the next phase of its military campaign, with officials stating that if President Trump chooses to expand the conflict, strikes could extend to Tehran and Iran's nuclear facilities. President Trump also dismissed ceasefire speculation, saying the US was "not finished at all with Iran" and had no interest in meeting with Tehran at this stage. The combination of those headlines saw crude reverse higher into the close, with the Houthis also renewing threats against Saudi-linked shipping, keeping concerns around regional energy supply firmly in focus. Financial markets reflected the defensive backdrop, with US Treasury yields, the Dollar and Gold all moving higher, including equities due to tech sector. Oil remained the key macro driver, with markets continuing to price the risk of further disruption to Middle Eastern energy exports as the conflict evolves.
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US DOLLAR
USD was firmer on the day, mainly driven by the renewed geopolitical escalation. Reports that the US is preparing the next phase of its military campaign against Iran, together with Trump rejecting the proposed 10-day ceasefire, kept the Dollar supported throughout the session. Oil finished higher after giving back the early diplomacy-driven pullback, while Treasury yields continued pushing higher as markets increasingly priced that elevated energy prices could keep inflation sticky. The rates move also helped USD, with the US 2-year yield moving back towards its YTD highs and money markets once again pricing over 30bps of Fed tightening by year-end. Although Fed officials entered the blackout period ahead of next week's FOMC meeting, Cleveland Fed's Hammack reiterated inflation remains too high and that higher rates may still be needed. Overall, geopolitics and the move higher in yields remained the main drivers for the Greenback, with the softer ADP employment print largely ignored.
Data:
- US ADP Employment Change Weekly 16.5K (prev. 19.3K).
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EURO
EUR was well supported on the day, helped by stronger-than-expected ZEW sentiment across both the Eurozone and Germany. The data provided some domestic support for the currency, with confidence improving sharply while German current conditions also stabilised slightly from previous lows. Markets remain focused on Thursday’s ECB meeting, where rates are widely expected to remain unchanged at 2.25% following June’s hike. Policymakers are expected to maintain a data-dependent approach without providing firm guidance on future moves. The ECB Bank Lending Survey showed a moderate tightening in credit standards for corporate lending, but had limited impact on the currency.
Data:
- EU ZEW Economic Sentiment Index (Jul) 23.4 vs. Exp. 11.5 (Prev. 9.5).
- German ZEW Economic Sentiment Index (Jul) 26.3 vs. Exp. 18 (Prev. 10.5).
- German ZEW Current Conditions (Jul) -77.6 vs. Exp. -77.8 (Prev. -81.0).
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GREAT BRITISH POUND
GBP sold off on the day and was the weakest G10 performer, with the main focus on the surprise appointment of John Healey as Chancellor and concerns around the government’s fiscal direction. Markets were cautious around the announcement of additional tax cuts and cost-of-living measures, with investors questioning the funding plans behind measures such as removing VAT on electricity bills and potential cuts to hospitality business rates. The labour report had limited impact on Sterling, with unemployment holding steady at 4.9% while employment growth beat expectations, but wage growth remained broadly unchanged. Markets are now looking ahead to Wednesday’s CPI and Friday’s Flash PMIs for further direction on the BoE outlook
Data:
- UK Employment Change (May) 147K vs. Exp. 85.0K (Prev. 100K).
- UK Unemployment Rate (May) 4.9% vs. Exp. 4.9% (Prev. 4.9%).
- UK Average Earnings excl. Bonus (3Mo/Yr) (May) 3.4% vs. Exp. 3.4% (Prev. 3.4%).
- UK Claimant Count Change (Jun) 6.7K vs. Exp. 28.3K (Prev. 31.2K).
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AUSTRALIAN DOLLAR
AUD outperformed across the board, supported by a strong bid in Chinese assets during the APAC session. Optimism around further Chinese stimulus helped lift risk sentiment, with reports suggesting Beijing's top leaders are expected to discuss additional support measures at the upcoming Politburo meeting later this month following the slowdown in Q2 growth. The prospect of faster bond issuance and further policy support boosted sentiment towards China-linked currencies, helping the Aussie finish as one of the strongest performers on the day.
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CANADIAN DOLLAR
CAD had a marginal session, remaining broadly flat as markets balanced ongoing trade uncertainty with a lack of fresh domestic drivers.
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NEW ZEALAND DOLLAR
NZD outperformed early in the session, supported by the stronger-than-expected inflation print and demand during the Asian session, but later succumbed to broader market sentiment and ultimately closed flat. The CPI data reinforced expectations for a more hawkish RBNZ outlook, with Q2 inflation rising to 1.5% QoQ and 4.1% YoY, both slightly above expectations.
Data:
- New Zealand Inflation Rate QQ (Q2) 1.5% vs. Exp. 1.4% (Prev. 0.9%)
- New Zealand Inflation Rate YY (Q2) 4.1% vs. Exp. 4.0% (Prev. 3.1%)
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JAPANESE YEN
JPY remained offered on the day, weighed by higher oil prices and ongoing concerns around energy supply disruptions. USD/JPY reached a fresh YTD high of 162.89, supported by broader DXY strength and the continued yield disadvantage facing the Yen.
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SWISS FRANC
Despite the ongoing geopolitical backdrop, markets showed little interest in holding the Franc, with USD catching most of the bid.