A Collapsed Ceasefire Reignites the Oil Threat as Warsh Faces Congress.
Summary
President Trump declared the ceasefire with Iran over at last week's NATO summit, sending oil sharply higher and reviving the inflation threat that had appeared to be fading
Iran has since declared the Strait of Hormuz closed once again, unwinding weeks of calm and casting fresh doubt over the disinflation that markets had begun to price
US inflation data for June is released on Tuesday, immediately followed by new Fed Chair Kevin Warsh's first congressional testimony, making it the pivotal day of the week
Andy Burnham is on the brink of becoming the UK's next Prime Minister, having secured overwhelming support from Labour MPs; he is expected to take office on 20 July
The fragile calm that had settled over markets through late June proved short-lived. Having stabilised for close to three weeks around its pre-war level, oil surged again last week after President Trump used the NATO summit in Ankara to declare the ceasefire with Iran over, following a fresh exchange of strikes. Brent jumped more than five per cent in a single session. The situation deteriorated further over the weekend, when Iran declared the Strait of Hormuz closed until further notice after a third round of US strikes. For markets that had begun to price a steady easing of inflation, the renewed conflict is a significant setback, and it lands at an awkward moment for a Federal Reserve already divided over the path ahead.
The dollar firmed as the renewed threat to energy supply reinforced expectations that the Fed will keep policy tight. The minutes of the June meeting, released last week, revealed a committee split down the middle, with the projections narrowly favouring one rate rise this year and officials judging the risks to inflation to be tilted to the upside. That backdrop makes Tuesday the most important day of the week. June inflation data is released in the morning, with headline price growth expected to ease slightly, followed ninety minutes later by Kevin Warsh's first testimony to Congress as Chair. Markets will be watching for whether he leaves the door open to a rate rise, particularly with the oil price climbing again. A firm inflation print combined with a hawkish tone would likely extend the dollar's recent recovery.
Sterling has held its ground as the political picture in Britain moves towards a decisive resolution. Andy Burnham secured the backing of more than three hundred Labour MPs on the first day of nominations, leaving him all but certain to become party leader unopposed and, with it, the next Prime Minister. He is expected to take office on 20 July. Markets have drawn some reassurance from the prospect of a swift and orderly transition, having feared a protracted contest, though the relief remains conditional on the fiscal direction he sets and his choice of chancellor. Attention this week also turns to Thursday's monthly GDP figure for May. The economy contracted in April as the energy shock weighed on output, and a second consecutive decline would raise fresh concerns about its resilience just as the new leadership prepares to take charge.
The euro has underperformed against both the pound and the dollar in recent weeks, and the renewed conflict complicates the European Central Bank's position. Having raised rates in June in response to the energy-driven inflation surge, the ECB now faces the prospect of that surge reigniting just as it appeared to be fading. Eurozone inflation had fallen back sharply in June, easing the pressure for further tightening, but a sustained rise in oil would quickly change that calculation. Final inflation figures for the bloc are due on Friday. For now the single currency is caught between a central bank that has already moved to tighten and an economy that remains subdued, leaving it vulnerable to the swings in energy prices that are once again driving sentiment.
Events to Watch This Week:
Tuesday 14 July: US CPI (June); Fed Chair Warsh congressional testimony
Thursday 16 July: UK monthly GDP (May); US retail sales (June)
Friday 17 July: Eurozone final CPI (June)
Tuesday stands out as the pivotal day for currency markets, with US inflation data landing just before the new Fed Chair faces questioning from Congress. With oil prices climbing again and the inflation outlook suddenly less certain, the potential for sharp moves across the dollar, sterling and the euro is considerable. Speak to the Orbis dealing team ahead of Tuesday to ensure your upcoming transfers are protected.
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