US
Markets continue to get whipsawed by swings in Iran war sentiment. Crude oil prices retraced part of this week’s slide after US and Iran exchanged fire. The global stock market rally stalled, bond yields ticked up, and the dollar index (DXY) staged a kneejerk rally to its highest level since April 7. JPY outperformance reflects growing intervention risk as USD/JPY approached 160.00.
Regardless, risk-on sentiment should remain supported because both sides are still talking to work out a deal that would ultimately reopen the Strait of Hormuz. In our view, DXY can overshoot the upper end of its nearly one year 96.00-100.00 range. Resilient US economic activity in both absolute and relative terms outweigh the drag to USD from a potential improvement in sentiment tied to the Iran war.
US April PCE is today’s data highlight (1:30pm London, 8:30am New York). The PCE print is expected to reinforce the pricing for a more restrictive Fed stance and underpin a firmer USD. Both headline and core PCE inflation are seen overshooting the FOMC’s 2026 projection of 2.7%. Headline PCE is seen rising 0.5% m/m or 3.8% y/y vs. 0.7% m/m or 3.5% y/y in March. Core PCE is expected at 0.3% m/m or 3.3% y/y vs. 0.3% m/m or 3.2% y/y in March.
Fed Chair Kevin Warsh said during his Senate confirmation hearing he preferred to follow “trimmed averages” inflation as opposed to core PCE price index. The Dallas Fed trimmed mean PCE and the Cleveland Fed 16% trimmed mean CPI are currently below core PCE, implying room for the Fed to loosen policy.
Nevertheless, the center of gravity on the FOMC has shifted from an easing to a more neutral bias raising the risk that Warsh becomes the first modern Fed chair to be outvoted on policy. Even dovish-leaning Fed Governor Chirstopher Waller pumped the brakes on cuts last week highlighting “I can no longer rule out rate hikes further down the road if inflation does not abate soon.”
We also get a fresh update of the Atlanta Fed GDPNow model that will incorporate today’s April PCE, durable goods orders, and new-home sales. As of May 21, the Atlanta Fed GDPNow model estimates annualized real GDP growth of 4.3% in Q2 vs. 2.0% in Q1.
Fed speakers today include: New York Fed President John Williams, St. Louis Fed President Alberto Musalem (non-voter), and Richmond Fed President Tom Barkin (2027 voter).
SOUTH KOREA
USD/KRW eased back to near 1500 after a brief rally above 1510. The Kospi plunged as much as 5% before trimming losses to around 1%. Bank of Korea (BOK) delivered a hawkish hold. BOK kept the policy rate unchanged at 2.50% for an 8th consecutive meeting (expected) and signaled the next move is a hike.
BOK Governor Shin Hyun Song stressed that the Board “judged necessary to raise the Base Rate at an appropriate time.” Moreover, two (Chang Yongsung, and Ryoo Sangdai) of the seven Board members dissented in favor of a 25bps hike, the first hawkish dissent of this cycle. Finally, BOK raised its 2026 real GDP growth (+0.6ppt to 2.6%) and CPI forecasts (headline: +0.5ppt to 2.7%, core: +0.3ppt to 2.4%).
KRW is the 4th worst performing currency since the start of the Iran war on February 28, largely because of South Korea’s negative net energy balance. Last week, South Korean FX authorities warned that the currency’s drop is “excessive relative to economic fundamentals, and will take decisive action if necessary.”
Indeed, KRW is significantly undervalued. The won is over -11% undervalued relative to its real effective exchange rate trend, the most since 2009. KRW undervaluation is unlikely to unwind until the energy shock fades.
EUROZONE
The ECB will publish the Account of the April 30 rate decision today (12:30pm London, 7:30am New York). At that meeting, the ECB kept interest rates on hold at 2.00% for an 8th consecutive meeting. The decision was unanimous, but ECB President Christine Lagarde flagged members debated “at length and in depth, a decision to possibly hike.” The Account will provide more insights into policymakers’ tightening bias.
The market has virtually fully priced in a 25bps ECB rate hike to 2.25% at the next June 11 meeting. Rate hikes in a sluggish growth, high inflation environment, is not bullish for EUR but should help cushion the downside. We see room for EUR/USD to edge lower towards support at 1.1400, reflecting a stronger US growth outlook relative to the Eurozone.
SOUTH AFRICA
South African Reserve Bank (SARB) policy decision is today (2:00pm London, 9:00am New York). SARB is expected to raise the policy rate 25bps to 7.00% after keeping rates on hold the last two meetings, effectively ending an easing cycle that began in September 2024. Headline CPI inflation in April was right on the bank’s Q2 forecast of 4% y/y. But core CPI inflation of 3.6% y/y in April is overshooting the bank’s Q2 forecast of 3.3% and argues for a hike. The swaps curve price in 75bps of hikes in the next twelve months, preserving ZAR’s real rate appeal.
