Investors and forex traders are closely watching the situation in the Middle East. Just a day earlier, markets were hoping for a quick end to the conflict after U.S. President Donald Trump said that peace talks with Tehran were constructive and that an agreement on reopening the Strait of Hormuz had largely been reached. However, today U.S. Secretary of State Marco Rubio noted that reaching consensus would take time. At the same time, U.S. forces carried out a strike on the territory of the Islamic Republic, which could once again become a driver of escalation. In response, representatives of the Islamic Revolutionary Guard Corps stressed that they reserve the right to retaliate in the event of any violations of the ceasefire. They also warned that Gulf countries could become targets if they continue to provide territory for U.S. military bases, which is clearly helping revive demand for the dollar as a traditional safe-haven asset. Markets are also preparing for the release of April data on the core Personal Consumption Expenditures price index. If upward pressure strengthens, the likelihood of borrowing costs remaining near 3.50−3.75% will increase significantly. At present, most experts do not rule out a tightening of monetary conditions early next year if consumer inflation remains above the Fed’s 2.0% target.
Eurozone
The European currency is gaining against the yen and the pound, while showing mixed dynamics against the U.S. dollar.
Investors are focused on hawkish comments from European Central Bank officials. Bank of France Governor François Villeroy de Galhau said that the regulator would take decisive action to lower inflation if necessary, while Executive Board member Isabel Schnabel noted that the ECB should raise borrowing costs as early as the June meeting, even if negotiations between the United States and Iran result in a peace agreement. According to her, the conflict has lasted longer than planned, and high energy prices have already been putting pressure on the eurozone economy for an extended period. ECB Chief Economist Philip Lane also confirmed that next month the regulator is likely to revise its inflation and economic growth forecasts downward due to the ongoing energy shock.
United Kingdom
The pound is losing ground against the euro and the U.S. dollar, while showing mixed dynamics against the yen.
Today, May retail price data from the British Retail Consortium were published: the index rose from 1.0% to 1.2%, exceeding analysts’ expectations of 1.1%. At the same time, food price inflation slowed to 2.7%, but remained well above the Bank of England’s 2.0% benchmark. Experts note that, against the backdrop of the energy crisis, overall price pressure is likely to continue strengthening, and retailers will not be able to cope with it on their own. As a result, the government may need to develop programs to subsidize fuel costs and ease bureaucratic barriers. In addition, traders focused on May data from the Confederation of British Industry retail sales volume balance: the indicator rose from −68.0 points to −46.0 points, compared with preliminary estimates of −52.0 points. Given negative sentiment among households, businesses expect further declines in sales, investment, and staffing levels.
Japan
The yen is losing ground against the euro and the U.S. dollar, while showing mixed dynamics against the pound.
Today, the Japanese government confirmed its assessment of a moderate recovery in the national economy, while warning that tensions in the Middle East and financial market volatility remain key risks. The report stressed that private consumption, business investment, and capital expenditure are actively recovering, while consumer prices are also showing moderate growth. The Bank of Japan’s core consumer price index rose from 2.5% to 2.8%, although experts had expected it to reach only 1.7%, thereby increasing the likelihood of monetary policy tightening at the next meeting.
Australia
The Australian dollar is strengthening against the pound and the yen, while showing mixed dynamics against the U.S. dollar and the euro.
In the absence of major economic releases, price movement is being driven by external factors. However, tomorrow at 03:30 (GMT+2), second-quarter inflation data will be released, which could significantly influence the Reserve Bank of Australia’s policy decisions. If the weighted average indicator remains at 4.6% or continues to rise, tighter monetary conditions will appear to be the most likely scenario. However, if the indicator corrects lower, as expected from 4.6% to 4.4%, together with the deterioration in the April labor market, where the unemployment rate rose from 4.3% to 4.5%, total employment fell by 18.6K, and full-time employment declined by 10.7K, this could support keeping current monetary policy unchanged for a longer period. According to most analysts, the key rate may reach 4.7% by December.
Oil
Oil prices are attempting to rise today.
Despite positive reports that appeared at the beginning of the week, the Middle East conflict is still far from over, leaving a significant risk of escalation and supporting the position of crude oil. Today, prices recovered part of their previous losses, gaining 3.4% and rising toward the 92.00 area amid local U.S. strikes on Iranian coastal infrastructure. Overall, the global physical shortage of crude oil continues to increase with each day that the key transport artery remains blocked. According to the latest estimates from UBS Group AG, global crude inventories being released to the market to ease the energy crisis fell by 246.0 million barrels in March-April, while total losses may reach 1.0 billion barrels by the end of May, supporting further hydrocarbon price growth in the medium term.
