US
Brent crude oil prices surged by over 5% as US-Iran military tension intensified overnight but later pared back a large chunk of those gains. The lack of follow-through in crude oil prices probably reflects growing anecdotal evidence of ships sneaking through the still heavily constrained Strait of Hormuz. On Tuesday, US Energy Secretary Chris Wright said that tanker traffic is “rising very meaningfully…We’ve been taking out millions of barrels of oil. Every night, we took out oil.”
The MSCI All Country World Index fell to a more than one-month low as a technology-led sell off deepened and the energy shock worsened briefly. US equity futures point to a rebound after the underlying index plunged -1.6% yesterday. Bond markets are stable.
USD is firm. We expect USD to edge higher as the US macro backdrop of improving labor demand and sticky inflation back a more restrictive Fed policy stance.
Yesterday, US May CPI data showed that the disinflation trend has stalled. In line with consensus, headline CPI inflation quickened to 4.2% y/y (vs. 3.8% prior), the highest since April 2023, on higher gasoline prices. Core CPI also matched consensus at 2.9% y/y (vs. 2.8% prior), but the monthly rise was -0.1ppt less than expected at 0.2% m/m (vs. 0.4% prior).
Importantly, the CPI measures which filter out extreme price swings, like the core services less housing CPI, Atlanta Fed sticky CPI, Cleveland Fed 16% trimmed mean CPI, and Cleveland Fed median CPI are moving further away from the Fed’s 2% target.
US May PPI is up next (1:30pm London, 8:30am New York). Watch out for PPI Services less Trade, Transportation, and Warehousing as it partially feeds into core services less housing PCE.
EUROZONE
EUR/USD is trading on the defensive around 1.1530. The ECB policy rate decision is today’s highlight (1:15pm London, 8:15am New York) followed 30mins later by ECB President Christine Lagarde’s press conference. The ECB is set to end a seven meeting pause with a 25bps policy rate hike to 2.25% because of rising inflation pressures.
In May, Eurozone core CPI rose to a 13-month high at 2.5% y/y, tracking closer to the ECB’s Q2 severe scenario (2.4%) than to its baseline forecast (2.2%) and adverse scenario (2.3%). Moreover, services CPI surged to a seven-month high at 3.5% y/y, raising the risk of a persistent pickup in inflation.
The ECB will also publish its June macroeconomic projections which will likely show a downgrade to its growth forecast. PMI data indicates Eurozone real GDP could contract by -0.2% q/q in Q2, a pace that sits between the ECB’s adverse (-0.1%) and severe (-0.3%) scenarios and below its current baseline forecast of +0.1%.
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.
TURKIYE
Türkiye’s central bank (CBTR) is expected to extend the pause to its easing cycle and keep rates on hold at 37.00% for a third straight meeting (12:00pm London, 7:00am New York). CBTR raised its year-end CPI target to 24% (from 16%) while economic activity almost stalled in Q1 (real GDP grew 0.1% q/q vs. 0.4% in Q4). Türkiye’s stagflation backdrop remains a drag on TRY.
CANADA
Yesterday, the Bank of Canada (BOC) left the policy rate on hold at 2.25% for a fifth straight meeting. The decision was widely expected. BOC reiterated its two-way policy optionality introduced in April that new US trade restrictions on Canada would argue for cuts, but persistently high energy prices could warrant “consecutive increases in the policy rate.”
Nonetheless, the statement suggests the BOC is in no rush to start raising rates. BOC pointed out “the economy is expected to remain in excess supply” and “So far, there has been limited evidence of broad-based pass-through of higher energy prices to other consumer prices.”
Bottom line: the swaps curve is too aggressive pricing in 50bps of BOC rate hikes in the next twelve months. Risk is USD/CAD grinds up to 1.4140 (November 2025 high) as the swaps curve adjusts lower.
JAPAN
USD/JPY is trading in a tight range around 160.50, just shy of its April 30 pre-intervention high of 160.72. Bank of Japan (BOJ) Governor Kazuo Ueda's absence at next week’s policy meeting due to hospitalization has limited short-term implications. A 25bps BOJ rate hike to 1.00% is already fully priced-in and the upcoming meeting does not include updated economic projections.
BOJ Deputy Governor Ryozo Himino will serve as acting chair while Deputy Governor Shinichi Uchida, will host a post-meeting press conference. Both individuals have consistently voted in line with Governor Ueda.
