18th June - A Hawkish Surprise
- 1 day ago
- 6 min read
Yesterday saw the G7 summit in France, where Trump signed the MOU with Iran a day early. The text of the deal has now also been released, with the key points below -
An end to conflict on all fronts - The text in the deal states the 'US, Iran and all allies' and says conflict will end on 'all fronts'. This by definition will include Lebanon.
Respect for Internal Affairs - Both have agreed that neither country will interfere with the other's internal affairs.
An extendable 60-day timeline - A final deal is due to be negotiated in the next 60 days, but this can be extended with mutual consent.
US to end naval blockade - This will begin with immediate effect and will end fully within 30 days. The number of vessels allowed through by the US will be proportional to the number allowed through the Strait by Iran. The US has also agreed to remove all US forces 'from the proximity of Iran' within 30 days.
Strait of Hormuz to be cleared - Iran will make arrangements 'using its best efforts' to allow ships safe passage through the Strait without charge. Traffic will start flowing immediately.
Iran reconstruction fund - The US has committed to developing a plan for reconstruction and development worth at least $300 billion. This involves, for example, regional partners such as the UAE could build a power plant with the US blessing in Iran, the value of which would contribute towards this $300 billion.
End of sanctions - The US will end all economic sanctions against Iran, including both those implemented by the UN Security Council and those implemented unilaterally by the US.
No nuclear weapons - Iran has committed to no nuclear weapons, and both sides have agreed to deal with the enriched uranium that Iran already has.
Frozen funds released - Iranian assets and funds that were frozen by the US will be released back to Iran.
Both sides will now begin negotiations on a wider deal, but this feels like the first and most important step that effectively signifies the end of the war. This outcome was largely priced in already and so did not move markets significantly, but the removal of the slight uncertainty will no doubt be a relief to markets in the long term.
Forex
Even with news of the deal being signed a day early, the largest news in markets by some distance was the FOMC meeting yesterday. Rates were held steady as expected, but the real market mover was the dot plot from the FOMC members. 9 of the 18 members projected a hike this year, with 6 of those even projecting more than one hike. This moved the year-end interest rate forecast to 3.8%, above the 3.625% that Wall Street had expected as a consensus. On top of this, Core PCE projections for year-end were revised to 3.3%, sharply up from 2.7% in March.
Warsh's first press conference confirmed the hawkish bias while also being purposefully vague on future plans for the FOMC. As noted yesterday, he has made clear in the past that he does not value forward guidance and followed through with no forward guidance yesterday. He did comment that the commitment to return to 2% inflation is "strong, unanimous and unambiguous" as well as announcing a number of 'task forces' to overhaul different parts of the FOMC's operations.
The net effect was to see the USD explode higher and US treasury yields do the same. The DXY was up a full 1% at its peak and flew through the previous 100.000 psychological level, the US 2-year yield saw a 3.2% change in the yield level while the 10-year yield also saw a 1.1% change.
It looks very likely that we saw another intervention from the BoJ yesterday on the news from the FOMC. The US outperformed its currency pairs significantly for all except the JPY, which only rose by 0.16%. Conversely, the EUR/JPY pair, for example, fell by 0.8%, which was mirrored for every other currency outside of the USD. As with previous interventions, we will not know for certain until the BoJ accounts are released, but it looks almost certain that the BoJ intervened to stop the USD/JPY from pushing past the 160s and up to 161.000. The question now is, does the BoJ continue to follow through? Following the FOMC meeting and the revised figures from the US, most fundamentals are now pointing to upward pressure on the pair. Does the BoJ intervene again, or does it abandon its position and allow the pair to rise? It may be that the BoJ is already 'pot committed'—it has already invested so much to defend its chosen level that it cannot afford to give it up.
GBP had a weaker day yesterday after the UK's CPI print came in lower than expected, at 2.8% instead of 3%. This was an interesting development ahead of the BoE's interest rate announcement later today. As with the FOMC yesterday, rates are expected to be held, but the interesting part will be the news surrounding it. We will see the voting split for the 9 MPC members of the BoE; any significant variation from the vote split that was expected would move the markets, as it would give us clues as to the BoE's mindset moving forward.
We will also see the SNB release their interest rate decision today, where again it is expected to hold at 0%. CHF had a mixed day yesterday outside of the USD/CHF pair, as the markets held their positions until after the FOMC and Iran deal uncertainty had passed. Should we see a more dovish tone from the SNB, or even an absence of hawkish language, we could expect to see some weakness in the CHF as risk-off hedges are unwound.
CAD once again struggled on the day as oil prices continued to fall, while the AUD and NZD also struggled as precious metal prices fell. The EUR weakened against the USD (as did everything else) but was also mixed on the day outside of this.
Indices
Indices were having a mixed day, right up until the FOMC dot plot was released. After the dot plot, the S&P 500 fell 1.12%, the Nasdaq dropped 1.04%, and the Dow fell 0.93% — around 507 points off its highs. Markets were concerned by the hawkish nature of the meeting, and demand was affected by the increased yields from treasury bonds, in particular the 2y bond yield. Even on a day when a peace deal was signed and oil continued to fall in price, markets took a significant hit from the FOMC news. It is worth noting that if oil continues to fall, we could see a rapid reversal in inflation prints and could see rate hikes become unlikely. As a result, inflation prints and the price of oil will be very closely monitored in the aftermath of the Iran peace deal. Now more than ever, they will be key to financial markets as a whole.
Precious Metals
As has been mentioned repeatedly in this blog, metals at the moment are at the mercy of US interest rate policy. Yesterday's hawkish language firmly closed the door on a rate-cut channel for the time being, which caused both gold and silver to struggle. Gold fell 2.85% from its intraday high, while silver fell 5% from its own intraday high. Both metals are likely to continue to struggle in the near future; metal bulls will be hoping to see a continued fall in oil prices and a rapid change in inflation figures. My position remains the same: we can expect to see metals' weakness in the short term as the energy shock makes its way slowly through the global economy, before strength in the long term.
Today's Key Market Drivers
GBP & CHF Interest Rate Decisions - Rates are expected to be held, so the real news here will be the respective members' voting patterns and the forward guidance provided by each.
BoJ intervention watch - Will the BoJ continue to defend its position, or will it admit defeat and let market forces move the market higher?
FOMC fallout - Today will be interesting to see how the market digests yesterday's news. Was the move yesterday an overreaction or the start of something larger?
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