10th June - Escalation Again
- 21 minutes ago
- 4 min read
Geopolitics
As has been the case with the Iran conflict countless times, sentiment shifted as the de-escalation optimism on Monday was unwound yesterday. A US helicopter was shot down in the area by an Iranian drone, which led to the US confirming it had launched strikes against Iranian targets in what it called a "proportional response." Iran then advised it had responded in kind, with attacks on US bases in the region as well as reports of an attack on Kuwaiti forces.
The contradiction in words and actions from the major players in the conflict was evident once again; on the same day Trump teased further military action, there were also reports that negotiations were continuing 'at a rapid pace.' This has been a regular occurrence and is causing continued confusion in markets. One genuinely positive note was that the US Energy Secretary Chris Wright noted oil traffic will continue to rise through the Strait of Hormuz, which did pull oil prices lower on the day overall. Whether this is genuine progress or yet another false dawn remains to be seen.
Forex
Yesterday saw the USD fall on the initial optimism carried over from Monday, before recovering all of those losses on the reports of escalation, closing close to even on the day overall. The market is now potentially in a holding pattern for the morning as we wait for the key CPI print later today, which will have a significant impact on the FOMC's plans moving forward. A hot CPI print will reinforce the higher-for-longer rate hike narrative, while a lower-than-expected number may give the FOMC some encouragement to keep rates lower for the time being. Either way, the figure will be consequential.
The USD/JPY chart remains a key pair to look out for, as it remains just below 160.400 at the time of writing. The action will centre around the CPI print - if we see a hot print could we see further signs of an intervention to mitigate USD strength, as we saw with the NFP print on Friday? The BoJ will be hoping for a lower-than-expected number to do the work for them.
Outside of the USD, there was not a huge amount of movement in other currency pairs that were caused by the currencies themselves. The commodity currencies in AUD, NZD, and CAD moved with their commodities (AUD and NZD down on lower precious metals, CAD slightly down on lower oil), while the EUR, CHF, and JPY were largely flat on the day.
The GBP did have a positive day overall, which could be attributed to the longer-term reduction in gilt yields we have seen over the past few weeks. The political uncertainty around Keir Starmer also seems to have dimmed for the time being, and markets seem to be a little less concerned about the UK economy as a whole. The narrative seems to have improved somewhat around the UK; it will be interesting to see if this continues as we move through the month. It is still weak against the strong USD, but depending on the CPI print today, that could change.
Indices
At the start of the US session yesterday, it seemed as though the optimism from Monday would carry over to the rest of the week and we would see continued moves higher. This all changed in the US session as the news of complications in the Middle East sent markets south. The markets did recover somewhat from the daily lows, but for the tech-heavy Nasdaq and S&P 500, yesterday was another negative day.
Until the end of last week, the optimists had been winning the battle of sentiment surrounding the negotiations to end the war in Iran, but over the past few days, there have been signs that this may be switching and markets may be realizing there is not a quick fix for the situation. Yesterday saw, once again, that the Dow Jones outperformed the Nasdaq and S&P 500, the implication being that tech stocks are more sensitive to news from the Middle East and that capital may be continuing to move away from growth and into value. If this is the case, it may end up being the best-case scenario for indices. It seems there is an inevitable bubble with AI and chip stocks that has been growing over the past few years, which past market history tells us has to burst at some point. If capital is slowly moving from these growth-heavy AI stocks to more established value stocks over the long term, could this be a slow release of pressure from the bubble instead of a sudden violent pop? Almost like letting the air out of a balloon slowly instead of popping it with a pin.
There is a long way to go and many twists along the way, but I am optimistic that in a scenario such as this, we may see a healthy market correction as we go through a rate hike cycle, instead of a sudden market crash akin to the Dot Com bubble.
Precious Metals
Yesterday was another negative day for precious metals, as they continue to be stuck in a worst-of-both-worlds scenario thanks to the Iran War. If we see a de-escalation in the conflict, it reduces the safe-haven demand for precious metals but does not reduce the sticky inflation expectations. If we see an escalation, it is hitting the metals due to higher inflation risks, but they are not seeing safe-haven demand return, as it is instead moving to the safer USD. Yesterday, Gold fell 1.5%, while Silver fell 4%, both to their lowest daily close since December 2025.
In the long term, there could be an argument for metals' strength thanks to supply deficits, central bank demand and eventual rate cuts. However, in the shorter term, until inflation fears are eased, there only seems to be one direction for precious metals, and that is lower.
Today's Market Drivers
Iran - The main driver stays the same, escalation or de-escalation will have an immediate and profound effect on the market.
US CPI Figures, 1:30 pm UK time - The largest economic data point for the week, this will shape the FOMC's interest rate guidance and is pivotal for all markets.
CAD BoC Rate Decision - 2:45 pm UK time - Rates are expected to be held; any surprise move or unexpected guidance from the BoC will move the CAD significantly.
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