Week of 1 JUNE

Market activity was influenced by geopolitics as traders waited for a deal to finalise the opening of the Strait of Hormuz. US inflation was in line with expectations and the RBNZ delivered a hawkish hold. Gold prices started the week just under $4,550 per ounce and trended lower amid growing uncertainty around a deal with Iran, falling as low as $4,400 on Wednesday, but recovered towards $4,570 as a deal seemed more likely.

The week ahead sees a step up in economic data releases, with Eurozone inflation and global PMIs likely to make headlines before the all-important US NFP on Friday.

Week in Review

Markets surged on Monday after US President Donald Trump said that a deal to end the war in Iran was "largely negotiated". Brent fell 7% compared to the prior week's close, trading below $98 per barrel at the start of the week. However, no deal was signed in the subsequent days, leading risk-hedging assets to rise, including the dollar. The US and Iran traded military strikes, spooking markets and sending Brent back above $100 in the first half of the week. Markets regained confidence that a deal was imminent by Friday, with Brent falling below $91 after reports that the US and Iran had verbally agreed to a 60-day ceasefire and were awaiting approval from the countries' leaders.

The Fed's preferred inflation measure, core PCE, rose to 3.3% as expected, confirming the CPI trend that energy costs were driving up consumer prices. However, the odds of a Fed rate hike this year declined by the end of the week to 50-50 from 70% last Friday, as markets were optimistic for Gulf oil flows to resume soon. A series of Fed speakers through the week affirmed the message of inflation uncertainty, suggesting that the split between hawks and doves remains.

The RBNZ held rates unchanged in a split vote, surprising markets that had expected a hike. However, Governor Anna Bremen delivered a hawkish message that left futures pricing in a rate hike at the next meeting.

ECB minutes revealed that a few members saw evidence that higher prices were leading to second-round effects, which delivered a more dovish tone. Futures see a 90% chance that the ECB will hike at its upcoming June meeting.

Biggest Market Movers

• Brent prices fell more than 10% by the end of the week on hopes of a deal that would open the Strait.
• Natural gas prices surged amid unseasonably hot weather, driving demand for peaking power in the US.
• Nikkei has the best stock index performance, followed by Nasdaq, on resurgent confidence in the AI trend, which has supported memory-manufacturing stocks.
• The NZD was by far the strongest-performing major currency after the RBNZ decision and the new government budget.

Week Ahead

If media reports are to be believed, the event most likely to drive markets is the pending deal between the US and Iran to open the Strait of Hormuz, which could be signed over the weekend. Failing that, the recent strikes across the Gulf suggest a resumption of hostilities is fairly likely. As far as the data is concerned, the main theme is likely to be US employment, as another strong NFP would clear the way for the Fed to turn more hawkish.

US NFP Still in Triple Digits

After both leading CPI measures showed accelerating core consumer prices and new Fed Chair Kevin Warsh holding the Fed responsible for inflation, Friday's NFP is the only hope for doves. Underperformance could suggest that the recovery in the jobs market isn't as strong as suggested, which could weaken the dollar and provide some support for gold. Analysts expect the NFP to come in at 102K, slightly lower than the 115K in April. While this is not fully back to growth levels (which are above 180K), if it stays in the triple digits, it could mean that the job market is continuing its recovery. This could hurt gold as it tries to reclaim $4600/oz, with a failure opening the door to $4300.

Eurozone CPI Ahead of ECB Rate Hike

Markets are now virtually pricing in a rate hike from the ECB at its June meeting, with the only potential obstacle being a surprise soft print on Tuesday's flash May CPI. The consensus among analysts is that Eurozone May inflation will rise to 3.4% from 3.0% prior. The core rate is projected to tick up to 2.3% from 2.2% as higher energy prices filter through the economy. However, the relatively modest increase in the core rate contrasts with recent ECB member rhetoric warning that the central bank needs to get ahead of the inflationary spike. A substantial miss on headline inflation could lower the odds of a rate hike and support the Euro. Holding the 1.1600 support could trigger a rally towards 1.1709, while a failure could reexpose 1.1575.

PMIs Suggest Global Resilience

The release of China's May PMIs at the start of the week could be the catalyst for commodity currencies, as the Asian giant is expected to show resilience despite higher energy prices. The Official NBS Manufacturing PMI is projected to advance into expansion territory to 50.5 from 50.3 in April, while the private RatingDog reading is seen easing to 51.9 from 52.2, still comfortably in expansion. Australia's Q1 GDP is expected to ease to 0.5% from 0.8%, but could be offset if China PMIs suggest raw material demand will remain solid. This could allow a revisit of the 0.7250 resistance, with disappointing data sending AUDUSD at least back to 0.7100.

Other Events & Earnings

Monday has UK Nationwide housing prices. US April JOLTS figures come out on Tuesday. Wednesday sees the US ISM services PMI. For Thursday, Australia's trade balance is scheduled. Friday includes Canadian jobs data.

Corporate reports are expected to be light, with names such as Palo Alto, Dollar General, Broadcom, CrowdStrike, and Lululemon updating investors this week.