11th June - "Iran Will Pay The Price"
- Jun 11
- 5 min read
Geopolitics
Yesterday saw further escalation in Iran that proved to be the dominant driver for the day. The US struck military targets in Iran as Trump warned that Iran will "pay the price" for not agreeing to a peace deal sooner. This was a markedly different tone from some previous comments, especially when followed up with action by the US military. The Iranians countered the strikes with their own, further jeopardizing what is still technically a ceasefire between the two sides.
Oil rose on the news, with Brent up 2.4% and US Oil up 2.75%. Both continue to be elevated above pre-war levels and have both found a base of support that price continues to bounce off. There is no reason this will change until the war is over, meaning inflation will continue to be a global issue along with it.
Forex
The big news from yesterday, outside of Iran, was the US CPI print, which came in soft in one metric but as expected in others. Core CPI m/m came in at 0.2% instead of the expected 0.3%, while Core CPI y/y, CPI m/m, and CPI y/y all came in as expected, albeit at higher figures than at any point in the past 3 years. The news did cause a temporary spike lower in the USD, but the news from Iran meant this was quickly reversed as safe-haven demand continued to flow back into the USD. The DXY has hovered around the 100.000 figure over the past few days, having broken out of its range following the NFP print on Friday, interestingly it has attempted and failed to move lower twice in the past two days.
Today we have the PPI inflation print for the US, which tends to be a more forward-looking figure and can give guidance on what to expect with future CPI prints. The unsurprising CPI print has now given more weight to the PPI figures, as markets continue to try to predict how the FOMC will act on interest rates.
The war in Iran, however, continues to dominate the markets and will do so until a more stable base is reached. Time will tell whether that is another commitment to negotiations or a surrender/retreat from one side. If we are to see further negotiations, the markets will need to see significant concessions from one side or the other going into them. If the same sticking points remain from the last round of negotiations, there will be little faith that an agreement can be found.
The USD/JPY continues to be an interesting pair, though it is being overshadowed by the events in the Middle East at present. The pair continues to grind higher, getting close to historical intervention levels each day. It continues to be one to watch amid the chaos surrounding it.
Outside of the USD, most currencies continued their recent trends yesterday with no major changes. EUR and GBP were broadly flat on the day with no direct catalysts for the currencies, they continue to be led by the currencies they are paired with. The EUR could have an interesting day as the ECB is due to release their rate decision today. The ECB is expected to hike rates, so the interesting part will be how they frame their guidance to the market around the decision. Will they be hawkish and advise more hikes may be needed, or dovish and advise they hope it is a temporary move?
The CHF and JPY continued to fail to find safe-haven demand. The USD remains the sole currency that is receiving this during the Iran conflict, despite the traditional expectation that CHF & JPY may find some support on a risk-off day. The commodity currencies also performed as expected, with AUD and NZD falling on weak precious metals and CAD rising on strong oil prices.
Indices
The broader story from yesterday was with indices, where we continued to see significant selloffs in the markets on the news from Iran. All three of the major US indices fell by at least 1%, with the Nasdaq now a full 7.5% away from its all-time highs last week. Markets are taking in the realization that there will not be a quick fix in Iran, that oil prices are likely to remain higher for longer, and that inflation will be a more pressing long-term issue than had been hoped.
The main difference in yesterday's selloff was that it was entirely based on geopolitics. The US CPI report should, if anything, have helped the indices as it could have eased inflation fears. The fact we saw such a selloff in that environment is a telling sign that the markets are concerned. Today will be another key day. If the market falls again, we could be at the start of a significant selloff; if it steadies itself, then yesterday could just have been a temporary adjustment. I still feel markets are due a more significant correction after the extreme move up since the start of the war; the question now is how aggressive will the correction continue to be?
Precious Metals
Precious metals continued to see every news event push their prices lower. Last week's NFP report pushed Gold and Silver lower on rate-hike fears, while yesterday's news had the same effect. The underlying reason did not change: the longer conflict causes longer oil spikes and longer inflation concerns, just this time it was from geopolitical news as opposed to an economic data point.
Metals are now completely focused on the rate-hike channel, with neither metal receiving any significant safe-haven bid yesterday. The only way we see a bounce in metals in the short term is news that eases inflation concerns, meaning today's PPI print could be very consequential. A soft print could give the metals a floor to rise higher from, but an as-expected or hot figure will put even more pressure on already pressured markets.
The analysis from previous posts remains: long term, there could be an argument to buy precious metals, but in the short term, the momentum seems to only be going one way.
Today's Key Market Drivers
Iran - Further strikes or any word of a resumption of the ceasefire will move markets.
US PPI, 1:30 pm UK time - This will continue to give us guidance as to the FOMC's interest rate path. Unexpected figures will move markets significantly.
ECB Interest Rate Announcement, 1:15 pm UK time - The ECB is already expected to hike rates today. The guidance surrounding it will be the most interesting part and will guide expectations for future rate decisions.
Comments