Oil prices lower, dollar softer

A potential US-Iran peace deal, amid ongoing negotiations, is driving markets at the start of the week, though trading volumes may be subdued today with the US and UK both out on public holiday. Brent crude oil prices are down around $5 from Friday’s closing levels to under $100 per barrel, Asian equity markets posted solid gains overnight, and European stocks have opened higher this morning (+1%). The dollar – which was little changed overall last week – is on the back foot, albeit modestly so, down about half a cent against both the euro and sterling to around $1.1640 and $1.3485 respectively. EURGBP opens little changed from Friday’s close at £0.8630. For the week ahead, it is relatively quiet on the economic data front, so the focus will be on developments related to the Middle East.

German government bond yields posted sizeable declines last week, of the order of 10-15bps across the curve, and they are another 4-7bps lower at the open this morning on optimism for a US-Iran peace deal. UK bonds outperformed strongly on the week, helped by softer than expected (UK) inflation and labour market data, with yields declining by 17-27bps. US government bonds had a decidedly mixed week, with 2-year yields increasing by around 5bps amid a firming of Fed rate hike expectations but 10- and 30-year yields falling by 3-5bps. In equity markets, European stocks added another 1% or so on Friday to round off a positive week (+3%), while the S&P 500 gained around 0.4% on the day and just under 1% on the week.

Fed Governor Waller says that, while he still has “concerns about the strength of the labour market, I have become more concerned that higher energy prices may have a lasting effect on inflation,” hence he  would support removing the “easing bias” language in “our monetary policy statement to make it clear that a rate cut is no more likely in the future than a rate increase.”

For the week ahead, as mentioned, the economic data calendar is relatively light with the Economic Sentiment Indicator for May in the Euro area on Thursday, and consumer confidence (May) and PCE inflation (April) in the US on Tuesday and Thursday respectively, the main releases of note. There are a large number of ECB, Fed and Bank of England members scheduled to speak over the course of the week.