Week of 6 JULY

A relatively quiet week in terms of economic data allowed geopolitics to take centre stage. A re-escalation in the Middle East overshadowed a more dovish tone in the FOMC minutes. Brent started the week under $72 per barrel after the holiday weekend but jumped to over $80 by Wednesday after Trump suggested the ceasefire was "over". The price fell back to $75 by Friday, as the market hoped renewed negotiations would include a climbdown in hostilities.

The coming week is quite busy, with US CPI ahead of Warsh's testimony in Congress, UK monthly GDP, and China's trade balance and Q2 GDP reading on the docket.

Week in Review

The main theme of the week was a resurgence in the AI trade amid earnings optimism, tempered by renewed geopolitical concerns. Some profit-taking in major tech firms allowed smaller semiconductor firms to outpace the market as investors seek value. Markets were in a holding pattern ahead of the FOMC minutes, which delivered a dovish surprise. Fed Chair Kevin Warsh's hawkish tone after the last meeting left the impression that a majority of FOMC members favoured hikes, but the minutes showed that it was only a few. Although the dollar weakened following the release, the market's outlook for the Fed remained the same, with around 80% odds of a rate hike by the end of the year.

The main driver of markets after the minutes was actually geopolitical events. Iran once again fired on ships trying to exit the Persian Gulf outside of its control, prompting tit-for-tat retaliatory strikes between the US and Iran for the rest of the week. At a meeting of NATO leaders in Turkey, US President Donald Trump suggested that the MOU was "over" but that negotiations would continue. Crude prices pared gains as markets hoped that a meeting between US and Iranian negotiators on Friday could end the strikes by the weekend. Gold prices fell below $4,050 per ounce on Wednesday, as geopolitical tensions overshadowed the more dovish Fed, but the yellow metal recovered towards $4,150 later in the week as the situation in the Middle East bubbled but did not boil over.

The RBNZ raised rates in a divided vote, as was generally expected, the first hike in more than three years, amid a slow economy but rising energy prices. The move was seen as "pre-emptive", but the bank signalled that more rate hikes are likely later in the year as the economy is expected to recover.

The DJIA hit an all-time high on Monday, supported by financials, while other US indices hovered near record highs but failed to break higher amid geopolitical concerns.

Biggest Market Movers

• The dollar was generally stronger throughout the week, supported by geopolitical developments that revived safe-haven flows.
• The NZD was the top performer among major currencies after the RBNZ offered a more hawkish outlook than markets had anticipated.
• The Swiss franc underperformed, weighed down by gold's weakness amid a stronger dollar.
• Bitcoin trended higher amid a recovery from a bottom hit at the start of the month, aided by a surge in tech interest.
• Natural gas prices fell during the week despite a rise in crude after an above-average build in inventories.

Top Events in the Week Ahead

An active economic calendar awaits traders next week, with US data likely to be the highlight. June CPI numbers come out before Warsh's testimony before Congress, as the market is still trying to assess the new Fed boss. The main theme of the week is likely to be a refocus on fundamentals amid China and UK GDP numbers and the start of what promises to be a tight Q2 earnings season. The recent run-up in stocks puts extra attention on corporate earnings to see whether they've lived up to their stock price growth and can push higher or if a correction is at hand. The BOC will hold its policy meeting on Wednesday, but with unanimous expectations of a hold, it's unlikely to move the currency significantly. Markets will also be paying close attention to negotiations between the US and Iran over the weekend to see if the conflict flares up or shipping through the Strait resumes, as the current calm is likely due to traders expecting the ceasefire deal to hold.

US Inflation and Warsh to Set Sentiment

Tuesday is the big day for markets, with the release of June CPI expected to cool to 3.9% on the headline, down from 4.2% in May. Lower crude oil prices are expected to contribute to the decline. However, the more closely followed core rate is projected to stay unchanged at 2.9%. The data is particularly notable given Fed Chair Kevin Warsh's recent insistence on controlling inflation. After the data release, he will give his first semiannual testimony before Congress, which is usually an opportunity for the Chair to offer some indications about the future of rate policy. However, Warsh has been steadfast on limiting forward guidance, leaving the market to react more strongly to the data. Higher inflation could support the dollar, as it could be the catalyst needed to price in a rate hike this year fully. But softer inflation, especially if coupled with softer rhetoric from Warsh, could weaken the dollar, allowing gold a second attempt at $4200.

China's GDP to Show War Effect

On Wednesday, China will be the first major economy to report its Q2 GDP numbers, which could reflect the impact of the war in the Middle East. The annualised growth rate is expected to slow to 4.7% from 5.0%, as the country continues to deal with energy supply issues. The data will be particularly important for commodity currencies after China's trade balance is released on Tuesday. Analysts expect the trade balance to increase slightly to $110 billion, from $105 billion, but the balance of imports and exports will be scrutinised for its impact on the Aussie. If China's economy beats expectations, it could send AUDUSD back to 70c, but a cooling in Australia's largest trade partner could weigh on the pair, bringing 0.69 into renewed focus.

UK GDP To Rebound in May

The monthly reading of UK GDP on Thursday is expected to show a bump back into the green at +0.1%, following April's surprise disappointment of -0.1%. The rolling three-month average is predicted to ease to 0.5% from 0.7%. Resilience in the British economy would provide even greater headroom for the future Chancellor, which might help allay worries about fiscal policy and push GBPUSD above 1.3500.

Other Events and Earnings

The US monthly budget statement will be issued on Monday. Tuesday includes the Australia Westpac consumer confidence and NAB business confidence figures. On Wednesday, Chinese FDI data comes out. Thursday has US retail sales. For Friday, the Eurozone current account is expected.

This week marks the unofficial start of Q2 earnings season, with reports from the largest US banks: JPMorgan, Bank of America, Goldman Sachs, Wells Fargo, and Citigroup. Other major names updating investors include Fastenal, ASML, Johnson & Johnson, Morgan Stanley, TSMC, GE Aerospace, UnitedHealth, Netflix and 3M.