Good morning
Over the weekend, the US military struck Iran’s three main nuclear sites, bringing the Israel-Iran conflict to a potentially more dangerous phase. US President Trump threatened a further military response if Iran retaliated, while Iran’s foreign minister said that Iran reserves all options to defend its sovereignty, interest, and people. Trump claimed that the attacks had wiped out Iran’s nuclear facilities, essentially quashing the country’s nuclear ambitions.
Trump had claimed that Iran was building a nuclear weapon, while Tehran had repeatedly asserted that this was not the case. Iranian media reports said that the country was now planning to block the Strait of Hormuz as retaliation for the attacks – a fifth of all oil and gas production goes through the Strait. For what it’s worth, betting market probabilities on a Strait of Hormuz closure by Iran climbed above 50%, an event that if fulfilled will no doubt easily send oil prices spiraling above $100/bbl. Such a move stands to greatly disrupt oil supplies to swathes of Asia and Europe, which could in turn trigger economic disruptions.
The dollar index rose 0.3% each in Asian trade to 99.11, extending mild gains from the prior week despite the dovish comments from Fed Governor Waller, supporting a rate cut as soon as July. The greenback was buoyed chiefly by safe haven demand, as traders waited to see just how Tehran would respond to the US attacks over the weekend. However, the impact on US Treasuries is a bit more uncertain given the significant trade deficit and tariffs combined with a potential increase in the supply of Treasuries given the soft fiscal policy.
Geopolitical headlines will continue to set the tone for trading, but traders will also keep an eye at the preliminary PMI releases. European PMIs printed rather bleak last month (50.2). For now, there is at least no better visibility on the outcome of the trade negotiations or on the geopolitical context. The US measure (expected at 52.1 from 53) last month still supported the Fed’s wait-and-see approach, but weaker figures might revive the market debate on an ‘earlier’ start. Traders again take notice of the fact that geopolitical uncertainty, at least at this stage, isn’t a big support for the dollar, which is still captured in a sell-on-rallies pattern. ECB’s Lagarde also speaks to the European Parliament this afternoon.
EUR/USD is trading back above $1.1500 in early European trade still indicating a strengthening of a bullish bias for the pair. The ECB signalled a pause in policy easing this month despite projections showing inflation dropping below its 2% target. This, in turn, could provide some support for the Euro.
GBP/USD is currently holding above $1.3400 while EUR/GBP gather some strength near 0.8570 during early European hours. GBP remains under pressure following the weaker than expected May retail sales data released on Friday. Analysts widely expect the BoE policymakers to cut rates by 25bp at the next meeting in August and to reduce by another 25bp in Q4.
USD/JPY pair rose 0.5% to 147.04, with the Japanese yen unusually seeing little safe haven demand. PMI data showed Japan’s manufacturing sector grew for the first time in 11 months in June, while service sector growth accelerated on improving consumer spending in the country. The composite indicator rose from 50.2 to 51.4, the highest level in four months.
Oil prices shot up after the attack, driving up concerns that high energy prices could fuel stickier inflation. This fuelled further risk-averse trade overnight with PHP, KRW and THB seen more vulnerable in Asia from an FX perspective to further sharp spikes in oil prices. Meanwhile, the likes of MYR, IDR and TWD should be more resilient.
AUD/USD pair slid 0.7% to $0.6407, even as PMI data showed sustained growth in manufacturing and services activity in June. The PMI print reflected some resilience in the Australian economy, especially amid a recovery in private consumption in the country.
USD/CNY pair rose 0.1% to 7.1878, while the USD/SGD pair rose 0.2% to 1.2912. China “strongly condemned” the U.S. attack and called on Israel to reach a ceasefire. At the moment analysts suggest the impact on CNY is likely to be minimal.
USD/KRW pair surged 0.7%, while the Indian rupee’s USD/INR pair rose 0.2%. INR is seen as relatively more vulnerable with a current account deficit closer to 2% of GDP together with relatively higher economic linkages to the Middle East.
| Interest Rate Swaps | EUR | USD | GBP |
| 3Y | 2.07 | 3.59 | 3.70 |
| 5Y | 2.23 | 3.60 | 3.75 |
| 10Y | 2.54 | 3.84 | 4.03 |










