Good morning
Ahead of the Fed meeting and after the release of UK CPI data at the open, European markets will be mainly looking at a busy slate of ECB speakers for direction. The list includes Nagel, Villeroy, Panetta, Knot, Escriva and Centeno at an event in Milan, while separately Chief economist Lane participates at a conference in Amsterdam. The final CPI figures for May are the only notable data for the bloc.
Markets widely expect no change to the Fed’s policy stance today (4.25%-4.50%) as the FOMC is seen in a wait-and-see mode as the central bank watches the outcome and impact of the US government’s tariff policies. More focus will thus be on the Fed’s updated projections and whether they will still show for instance the median expectation of two 25bp cuts this year. There is indeed a good chance that the median could shift to showing just one cut, as it would just take two FOMC members to change their view from two cuts to one.
Ahead of the Fed the jobless claims data will be the main release after initial claims have gradually inched higher over the past weeks. The US will also publish the TIC data on Treasury holdings for the month of April.
Rising tensions in the Iran-Israel conflict and weak US retail sales led to another day of negative risk sentiment yesterday. Retail sales declined by 0.9%m/m in May, worse than Bloomberg consensus forecast of a 0.6% drop. Additionally, industrial production and capacity utilisation were slightly below market expectations. Equity indices fell by 0.5-1.0% across developed markets, and most Asian markets are posting losses this morning. US Treasury yields ended lower across the curve despite a significant increase in oil prices throughout the day. The Brent price closed up by $4/bbl. at $76.5/bbl., the highest level since February.
The USD index fell about 0.1% in Asian trade to 98.64.
EUR/USD declined below 1.15 as the USD broadly rallied during the US session amid growing market concerns that tensions in the Middle East could escalate, potentially drawing in direct US involvement. However, despite higher oil prices, receding US recession risks in recent months, and solid US equity performance, the greenback struggles to find persistent support. There is growing evidence that the de-dollarisation narrative is gaining traction, with central banks increasingly accumulating gold - now the world’s second-largest reserve asset - and European investors gradually reducing USD exposure in Q1. This trend is likely to persist in the second half of the year.
EUR/GBP moved higher during yesterday's session, continuing its climb since the end of May. Today's focus turns to the release of UK CPI for May. Consensus expects headline to tick down to 3.3%y/y (from 3.5%), core to drop to 3.5% (from 3.8%) and importantly services to decrease to 4.8% (from 5.4%). The expectation of a significant drop in services inflation most likely reflects the wrongful overestimation by the ONS of the increase in road tax in May. Traders do not expect today's print to be a game changer for the BoE decision released tomorrow.
In Japan, the BoJ left its policy rate unchanged at 0.5% yesterday, in line with expectations, while announcing that it will cut its monthly JGB purchases in a bid to improve bond market functioning. USD/JPY remained relatively steady following the largely uneventful BOJ meeting and after PM Shigeru Ishiba said the country had not reached a trade deal with the United States during the Group of Seven summit.
The South Korean won was an outlier, with the USD/KRW pair falling 0.6% to 1,369.61 and remaining in sight of a recent eight-month low. The Taiwan dollar was also an outperformer, with the USD/TWD pair falling 0.4% to 29.537.
USD/CNY pair was steady around 7.1856, with focus now on the PBoC, which is set to decide on its benchmark loan prime rate later this week.
AUD/USD pair rose 0.2% to $0.6503, while USD/SGD pair was flat at 1.2841. The Indian rupee also tread water with USD/INR trading around 86.325.
| Interest Rate Swaps | EUR | USD | GBP |
| 3Y | 2.09 | 3.63 | 3.69 |
| 5Y | 2.25 | 3.64 | 3.74 |
| 10Y | 2.56 | 3.86 | 4.05 |










