Dollar gives up ground
Donald Trump yesterday declared the US-Iran ceasefire “over” before a short time later saying renewed US attacks on Iran would end “very quickly”. The latter remarks have helped stall the rise in oil prices (for now anyway) and provide some reassurance for markets. In addition, the minutes of the Fed’s June meeting gave no indication that an interest rate hike might be imminent, further reassuring markets. In FX, the euro and sterling have both rebounded against the dollar. The single currency is trading at around $1.1440 this morning, up from lows yesterday of just below $1.14, while the pound is trading north of $1.34, up about a full cent from yesterday’s lows of circa $1.3320. The pound continues to edge higher against the single currency, trading at around £0.8525 this morning.
Central bank rate hike expectations firmed notably yesterday, with the market pricing in an additional circa 25bps of policy tightening by the Bank of England and ECB, and circa 15bps by the Fed, over the next year or so, though they have eased again somewhat on the back of Trump’s comments. UK and German government bonds yields rose sharply, increasing by 10-15bps, while US yields ended just 3-5bps higher, having fallen back somewhat in the run-up to the close of business. In equity markets, European stocks were under the cosh, shedding more than 1%, while the S&P 500 erased earlier losses to end just marginally lower on the day. European stocks have opened in positive territory this morning though, up almost 1% at the start of play.
The minutes of the Fed’s June meeting noted that recent information “suggested that upside risks to inflation remained elevated while downside risks to employment had moderated a bit,” with “a few members” commenting that there was a case for raising interest rates. Members noted that there were “scenarios in which inflationary pressures would dissipate and inflation would soon begin to return to 2%, allowing rates to remain on hold (and eventually be lowered), while also pointing to “scenarios in which inflation would remain elevated due to strong AI-related demand, the conflict in the Middle East, or the effects of tariffs”, which in turn would warrant some increase in rates to return inflation to the 2% target.
It’s a quiet day ahead in terms of economic data with just the regular weekly jobless claims and existing home sales (for June) due in the US. The ECB publishes the minutes of its June monetary policy meeting.