US
The US-Iran mood swing has turned positive again, lifting markets back into risk-on mode. President Donald Trump declared yesterday “We ended the war with Iran today” and expects a signing ceremony for the memorandum of understanding over the weekend.
Brent crude oil price dropped further, unwinding roughly two-thirds of its rally since the February 28 outbreak of the Iran war. The MSCI All Country World Index recovered sharply from a more than one-month low, and bond yields plunged across the board.
USD dropped against most currencies on news of the positive US-Iran breakthrough and has since recouped part of its loss. We are sticking to our view that USD can edge higher in the near-term. Resilient US economic activity in both absolute and relative terms outweigh the drag to USD from easing geopolitical fears.
June University of Michigan sentiment survey is due later today (3:00pm London, 10:00am New York). Long-term inflation expectations are critical to watch for confirmation that long-term inflation expectations remain anchored.
The May PPI is a red flag for the US economy. Headline PPI increased to 6.5% (vs. 5.7% prior), the highest since November 2022. In comparison, headline CPI rose to 4.2% y/y (vs. 3.8% prior), the highest since April 2023. The widening gap between PPI and CPI points to either margin compression if firms continue to absorb rising input costs or greater pass-through into consumer prices, neither of which is particularly encouraging for the economic outlook.
EUROZONE
EUR/USD dipped towards 1.1500 following yesterday’s ECB policy decision before rebounding to a high of 1.1590 driven by the positive US-Iran breakthrough. We expect EUR/USD to edge lower and stabilize closer to 1.1400, reflecting a stronger US growth outlook relative to the Eurozone. ECB rate hikes in a sluggish growth, high inflation environment, is not bullish for EUR but should help cushion the downside
As was widely expected, the ECB raised the policy rate 25bps to 2.25% because of rising inflation pressures. The decision was unanimous, with policymakers continuing to view risks to the inflation outlook as tilted to the upside and risk to the growth outlook skewed to the downside. Indeed, the ECB marked up its inflation forecasts and trimmed its real GDP growth projection for 2026 and 2027.
The swaps markets price in 60% odds of a follow-up 25bps rate hike at the next July 23 meeting. We think the ECB can afford to be patient before tightening again. Cooling Eurozone wage growth and subdued demand conditions should help contain second-round inflation effects from the energy shock.
UK
GBP/USD pared back some of yesterday’s positive US-Iran breakthrough gains. We expect GBP/USD to fall to 1.3100, reflecting a stronger US growth outlook relative to the UK. BOE rate hikes in a sluggish growth, high inflation environment, is not bullish for GBP but should help cushion the downside.
In line with consensus, UK real GDP fell -0.1% m/m in April vs. +0.3% in March. This is the first monthly fall since August 2025 and was driven by a decline in services output (-0.2% m/m). Production showed no growth, and construction grew by 0.1% m/m.
PMI data indicate UK real GDP could contract by -0.2% q/q in Q2, undershooting the BOE’s baseline forecast of +0.1% q/q. The swaps curve slashed BOE rate hike bets over the next twelve months to 40bps from 60bps yesterday. But that largely reflects falling energy prices, as tightening expectations have been curtailed across most other major economies.
The UK political backdrop can amplify a GBP undershoot. Attention is increasingly shifting to the June 18 Makerfield by-election. Recent polls show Andy Burnham with a 10-point lead over Reform UK, potentially clearing a path for his return to parliament and a leadership challenge to Prime Minister Keir Starmer. A Burnham-led Labour government will likely lead to more spending and borrowing, worsening UK fiscal credibility.
SOUTH KOREA
KRW outperformed most currencies overnight and the KOSPI jumped as much as 8.5% before settling 4.6% higher. Year-to-date, the KOSPI is the world’s best performing equity market, up a whopping 92%, driven by the AI-led semiconductor boom. Samsung Electronics and SK Hynix account for a huge share of the index.
Bank of Korea (BOK) Governor Shin Hyun Song delivered hawkish remarks, consistent with his previous guidance. Shin said “it is necessary to place priority on price stability and raise interest rates before it is too late.” At its last May 28 meeting, BOK kept the policy rate unchanged at 2.50% for an 8th consecutive meeting while Shin stressed that the Board “judged necessary to raise the Base Rate at an appropriate time.” The BOK next meets on July 16 and a 25bps hike to 2.75% is increasingly likely.
