2nd June - Edging Closer
- 4 days ago
- 4 min read
Geopolitics
There was no deal announced yesterday, but there did seem to be some signs of slow progress. Trump reportedly requested changes to the draft MoU, including changes related to the Strait of Hormuz and the removal of enriched uranium. The key implication here is that the text was not rejected outright by Trump, but instead amended - the deal is being refined, not thrown out. The hope is that this means we are edging closer to an agreement between the two parties, but the concern is that the sticking points are the same ones that have held up negotiations in the past.
The market has continued to interpret this as further evidence that a deal will be signed imminently, with risk assets moving higher even with an increase in oil prices yesterday. The next few days seem like they could be a turning point in the conflict; if we do reach an agreement, we will see the markets fully return to focus on traditional fundamental factors, whilst a breakdown in talks will lead to a flight to risk-off assets.
Forex
Yesterday saw some support for the USD, even as deal optimism pushed capital towards risk-on assets. The recent higher inflation numbers from the US were supported by higher-than-expected ISM PMI figures yesterday, causing the DXY to push back above 99.000. In the short term, the USD may still be affected by positive news out of Iran, but in the long term, the fundamentals are lining up behind dollar strength over the coming months.
The USD/JPY continued higher yesterday on continued JPY weakness and USD strength. We are sitting this morning at 159.700, only a touch away from the 160.000 level. This is now the most interesting price point in currencies over the next few days, as we anxiously wait to see if the BoJ will intervene again above the 160.000 level. In the past, they have not intervened at 160.000 exactly, but have waited to see if the market reacts itself to the psychological level before then intervening. They acted at 160.700 in April 2026 and even waited until 161.700 back in July 2024, this time we likely will not know when they will intervene until it has already happened, or even if they will intervene at all. As has been mentioned in the past, the opportunity is there for a good asymmetric risk opportunity. Making a short trade at or just above 160.000 could lead to quick profits on an intervention with limited risk if placed correctly.
Yesterday was a strong day for the GBP, as risk-on sentiment, cooling gilt yields, and slowly reducing political uncertainty added up to push the Pound higher. The GBP gained on all currencies, but particularly outperformed the CHF. The CHF struggled significantly yesterday, most likely due to the already mentioned risk-on flows. It is likely that CHF was bought on Friday as investors hedged against an uncertain weekend geopolitically. Once the weekend passed without any shocks, these positions were then unwound which would have caused the strong move we saw yesterday. The full GBP basket strengthened and the full CHF basket weakened, but the relative moves were most obvious in the GBP/CHF cross where we saw a move of 0.66% in just one day.
The commodity currencies continued to react to commodity prices themselves, as they have been doing for the past few weeks. AUD saw some pressure as precious metals fell, whilst CAD saw some support as oil rose. These relationships will continue to be key for these currencies over the next few weeks as we continue to wait in limbo for a peace deal to be agreed upon.
Indices
It will be a surprise to few that indices were broadly positive yesterday amidst the risk-on flow of capital. The Nasdaq, S&P500, Dow Jones, and Nikkei once again made fresh all-time highs, while the FTSE100 moved back closer to its own. The reasoning remains the same: optimism that a deal will be reached paired with strong performance from the AI and tech sector more broadly. Yesterday saw a boost from Nvidia, the largest of all, which rose over 6% on the announcement of a new processor for personal computers. However, the only other green sector on the day was the energy sector, as oil prices gave some support. This continues to play into the narrow leadership conversation, where the markets are being led by a small few mega-companies while smaller companies struggle by comparison. All signs are pointing to us being late in the cycle for the boom in stocks and shares, with the markets more and more at risk of a significant selloff if there is any news to rock the AI and tech sectors.
Previous warnings on this blog still stand; currently there is limited upside to going long in indices, but very significant downsides if it goes wrong.
Precious Metals
Both Gold and Silver fell yesterday on strong PMI data from the US, leading to higher chances of rate hikes. Even with the potential for a deal to be signed and oil prices to reduce, the growing sentiment that rates will be higher for longer is eating into any demand that precious metals may have seen from the end of the conflict. We may still see a small bounce if a deal is signed, but at the moment, Gold especially remains caught fighting both a reduction in safe haven demand and an expected rate hike move from many of the world's leading central banks. As a result, the near-term bias remains lower. Silver, as mentioned, will be helped by industrial demand for the metal but is still fighting the same headwinds moving forward.
Today's Market Drivers
Iran - Any news on the deal, either a concrete agreement or any progress either way, will be the main market drivers today.
BoE Gov Bailey Speaks, 3pm UK time - This could move markets for the GBP if we see unexpected language from the BoE Governor. It could be a non-event, but it is important to be aware of nonetheless.
JOLTS Job Openings, US, 3pm UK Time - This will not have the effect the ADP Non-Farm Employment Change figure will have tomorrow or the main NFP figure on Friday, but it will continue to give an indication as to the US economy's strength as we continue to move towards the FOMC's next rate decision.
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