Instimatch - FX Morning Commentary - 16/6/25

Good morning

The Iran-Israel conflict has led to a worsening of the market risk sentiment. Over the weekend, Israel has targeted Iranian energy facilities, and this further increases the risk of a lasting oil market shock due to the conflict. Oil prices are slightly higher this morning with Brent trading at one point above $75/bbl. Market-based inflation expectations are also moving up, putting upward pressure on nominal rates across regions. The USD has broadly rallied across G10 since Friday, likely supported by the spike in oil prices given the US's position as a net energy exporter with safe haven assets such as gold prices picking up, coupled with some modest Asian FX weakness.

So far US President Trump has kept the possibility of US involvement in the conflict open, even as he mentioned that it’s possible that Israel and Iran could reach an agreement to end their conflict, though the two sides may need to continue fighting before they’re ready to broker a peace deal.

Today's calendar is a quiet one with a few ECB speakers (Nagel and Cipollone) as the highlights. The remaining part of the week will be all about the major central banks with monetary policy meetings from the Bank of Japan on Tuesday, the Fed and Riksbank on Wednesday and Norges Bank, Bank of England and the Swiss National Bank (SNB) on Thursday.

The Fed is expected to leave rates on hold, and though Powell will likely carefully avoid strong forward guidance, risks could be tilted towards lower rates and further USD weakness if Powell gives a clearer signal that resuming rate cuts is not a question of if but when. The BOE is also expected to keep the Bank Rate unchanged at 4.25% in line with current market pricing and repeat its previous guidance of a 'careful and gradual' approach to removing policy restraint. Apart from monetary policy the week also features the G7 summit in Canada, where trade policy will be at the centre of discussions.

The big event for Swiss markets this week is the SNB rate decision on Thursday. Analysts expect the SNB to deliver a final cut, cutting the policy rate by 25bp to 0%, although it is a close call between 25bp and a larger 50bp cut. Markets are pricing 31bp for the meeting. The latest inflation prints for May showed a return to deflationary territory at -0.1% y/y and inflation continues to undershoot the SNB forecast, which stands at 0.3% y/y for Q2 2025. However, the SNB is still expected to stick with a smaller 25bp cut and if necessary, will commence on FX intervention to weaken the Swiss Franc before lowering into negative territory. So far, there has been little evidence of FX intervention in sight deposit data.

The USD index rose around 0.1% in Asian trade to 98.09.  The US dollar got some temporary reprieve after reaching multi-year lows earlier last week. Since the US turned net energy exporter in 2019, the dollar and oil prices became positively correlated especially during oil supply shocks and geopolitical tensions. Closing at EUR/USD 1.1549, the greenback remains vulnerable to further losses though. Especially as geopolitics often only have a short shelf-date as market-moving theme.

GBP/USD is holding above $1.3550 trading around $1.3570 during Asian hours.

Analysts see these current geopolitical tensions as probably delaying the path of rate cuts across Asian central banks, including from the likes of India, the Philippines, and perhaps South Korea, but should not change the ultimate destination. Nonetheless, the left tail risks are quite meaningful here, and traders will be wary.

China's May data released overnight was mixed with strong retail sales from 5.1%y/y to 6.4%y/y, but soft readings on fixed-asset investment and property price. Overall, though, data suggests that China remains on track to achieve its growth target in the first half of 2025. The PBoC is set to decide on its loan prime rate later this week and is expected to leave the rate unchanged after a cut earlier this year.  China’s yuan is unaffected by the data. USD/CNY rose slightly overnight to 7.1837.

Other Asian currencies were steady trading within tight ranges. The South Korean won was an outlier, with USD/KRW falling 0.3% to around 1,360.61. The won strengthened sharply in June after South Korea’s liberal party won the presidency in a snap election, potentially ending months of political upheaval in the country.