Week of 15 JUNE

Over the week, economic data displaced geopolitics as the main market driver, with US inflation coming in hotter than expected while the ECB hiked rates and remained non-committal about the future path of rates. Brent rose to almost $98 per barrel after Iran shot down a US helicopter, deepening the crisis, but by Thursday, Trump again announced a deal had mostly been reached, and crude fell towards $86 heading into the weekend after he cancelled strikes against Iran.

The week ahead is dominated by central bank decisions, with the Fed and BOE expected to hold, while the BOJ is under increasing pressure to hike.

Week in Review

Markets this week were in risk-off mode, as the prior week's data was met with a higher US CPI and shifting tensions in the Middle East, which supported defensive plays and safe havens like the dollar. The rotation out of high-valuation tech stocks continued, with the Nasdaq leading declines among the three major US indices. The premier tech index was down almost 7.0% at one point before recovering towards the end of the week.

US May inflation rose to a 3-year high on the headline at 4.2%, matching expectations, while the core rate rose to 2.9% as expected. PPI a day later was hotter than anticipated, adding to the perception that the Fed will have to address higher inflation, supporting the dollar.

However, investors seem to be betting that the FOMC will consider measures other than rates, as the odds of a hike by the end of the year moderated to 60% from 70% in the wake of the data. The dollar index trended higher alongside Treasury yields, putting pressure on gold, which started the week at around $4,350 per ounce, falling to as low as $4,060 before recovering towards $4,250 by the end of the week.

Crude prices fluctuated amid shifts in the situation in the Middle East, with both sides trading strikes at the start of the week. On Thursday, US President Donald Trump posted on his social media, threatening to take Kharg Island, prompting markets to take on a risk-off tone. However, hours later, he said that a deal had been agreed with the Iranian leadership and that he had called off further attacks, adding that the agreement could be signed in Europe "in the coming days". Global markets surged on Friday as investors hoped the Strait of Hormuz would reopen immediately after the deal was signed.

The ECB hiked by 25 basis points, as widely expected, but kept all options open, a move considered slightly more dovish than anticipated. The euro knee-jerked lower but soon recovered to trade higher as the market continues to price in one more rate hike in September.

The BOC kept rates unchanged, as widely anticipated, while striking a more hawkish tone by suggesting there was little sign yet of energy-related inflationary pressure.

UK GDP in April unexpectedly turned negative, but analysts attributed this to front-loading of purchases in March. The political situation came back into focus as Defence Secretary John Healy resigned over the lack of funding for the Armed Forces.

SpaceX launched its much-anticipated IPO, with the offering oversubscribed 4x, catapulting CEO Elon Musk into the ranks of the world's first trillionaires.

Biggest Market Movers

• The NZD was the best performer of the major currencies, riding on a more hawkish RBNZ and robust Chinese trade data.
• CAD was the weakest of the major currencies after a more dovish-than-anticipated BOC meeting.
• Crude prices slid through the week despite tensions between the US and Iran and tumbled when Trump announced a deal was almost ready.
• Bitcoin was in recovery mode through the week, rebounding from last Friday's selloff.
• Japan's Nikkei 225 index showed strong performance this week amid a resurgence in demand for semiconductor and AI infrastructure stocks.

Top Events in the Week Ahead

The main event of the coming week could be the US and Iran's agreement to end hostilities, but it's not the first time that Trump has made a similar announcement and the war continued. In that case, the market will likely focus on central banks, with the Fed, the BOE, and the BOJ under scrutiny, as the RBA is expected to hold while it measures the impact of the last hike amid the busiest monetary policy week of the quarter. The G-7 will take place in France at the start of the week, with investors looking for geopolitical sparks as Trump meets with world leaders. India's Prime Minister Narendra Modi and Brazil's President Luiz Lula will also be in attendance. Traders will also monitor the fallout from SpaceX's IPO and expect the Russell index rebalancing to be announced before the end of the week.

FOMC: Meet the New Boss

The Fed's policy meeting on Wednesday is by far the most important for the markets, even though there is a near-unanimous expectation that interest rates won't change. Traders will be watching for any changes in communication style, language and emphasis on metrics under the chairmanship of Kevin Warsh. The Fed could also release an updated version of its dot-plot matrix, but it is one of the things in contention, as Warsh has vowed to shake up how the Fed communicates with the market. Traders will be looking to see whether the Fed takes on a more hawkish tone in light of recent jobs and consumer price data, which could support the dollar index after its rejection at the 100.00 round resistance level.

BOJ Expected to Finally Hike

Around 90% of economists predict the BOJ will hike rates on Tuesday, with the market pricing in similar odds. This would be the first hike since the end of last year as the BOJ held off amid geopolitical uncertainties and a weaker yen. Concurrently, the BOJ could adjust its bond-purchasing program to soften the impact of a rate hike, but the odds of that are seen as low. Markets will pay close attention to the tone of the post-rate-decision press conference, to be led by Deputy Governor Uchida Shinichi, given Governor Kazuo Ueda's hospitalisation. Trading back near this year’s peak above 160.00, the hike could trigger a cascade of shorts towards 158.00.

BOE Hold With Focus On Hike Timing

Futures are pricing in a near-certain BOE rate hold on Thursday, but that could be disrupted by UK CPI data coming out the day before. May UK inflation is expected to accelerate to 3.1% from 2.8% a month earlier, with the core rate ticking up to 2.6% from 2.5%. If inflation misses or beats, it could shake up how the market interprets the vote split. At the last meeting, the hold was 8-1, with Chief Economist Huw Pill dissenting in favour of a hike. The markets will look to see how many join him this time around to gauge how soon the BOE will have to tighten policy and the impact on sterling as it faces resistance above 1.3400.

Other Events & Earnings

Monday has German wholesale price data. US housing starts are scheduled for Tuesday. For Wednesday, Japa's trade balance is expected. Thursday includes UK unemployment data. Friday sees Japan inflation.

The week is light on the corporate earnings front, with notable names reporting, including Tesco, FirstGroup, Jabil, Carmax, and Accenture.