- Stalled US-Iran talks are supported by rising oil prices and risk-off cyclical market movements.
- Focus shifts to the new Fed Chairman and Fed spokesman as inflationary pressures accelerate.
- Nvidia Earnings Could Extend or Derail U.S. Stocks’ Rally; Gold lacks bullish catalysts.
- PMIs are fundamental to the euro’s performance; Political unrest in the UK could intensify, leading to a weakening of the pound.
- USD/JPY rises again as Bank of Japan’s intervention strategy fails.
Conflict in the Middle East dictates market sentiment
Two and a half months after the start of the conflict between the United States and Iran, a comprehensive agreement remains elusive. Negotiations continue behind closed doors, but incentives on both sides appear to have diminished to find a solution that would reopen the Strait of Hormuz. This leaves the rest of the world scrambling over declining oil supplies, keeping prices above $100, keeping central bankers on edge, and causing short-term bouts of risk aversion.
After a period of range trading, both the US dollar and gold were moving, at the time of writing, driven mostly by Middle East headlines. Meanwhile, US stock indices hit all-time highs, despite mixed data releases, while Bitcoin strangely appears to be more responsive to these economic outlook concerns. With implied volatility remaining moderate, what events could shake the markets next week?
Chairman Paul Burch was replaced: the end of an era
After eight years in charge, Powell’s term as Fed Chairman ended, with Kevin Warsh officially taking over. His views on monetary policy remain a black box, but the countdown to his first speech, which should move the market considerably, has only just begun.
In this context, the minutes of the April meeting will be published on Wednesday. Investors will be interested in the extent of the tough debate within the Council, and the readiness of members to decide on an interest rate change in June. With Warsh in charge, the overall situation could change appreciably, but the minutes and continued federal talk will give a strong signal about where the center of gravity lies within the council.
Various housing data, preliminary PMIs and the Philadelphia Fed’s manufacturing survey can provide valuable information on underlying economic trends. Notably, despite accelerating CPI and Producer Price Index (PPI) reports, markets are currently anticipating a tightening of just 13 basis points in December, with the first 25 basis point rate hike priced in full by April 2027.
Therefore, the dollar will remain torn between various headwinds and tailwinds. The US-Iran deal, a tougher stance on tariffs and potential US Treasury auctions, and Wednesday’s 20-year auctions that could be the weakest link, may reduce the dollar’s appeal, while renewed Middle East headlines keep the door open to new hostilities, boosting interest rate hike chances, and continued strong performance for US stocks will keep the dollar in demand.
The latter is key, as Wall Street continues to ignore US economic data, concerns about the global slowdown and rising US Treasury yields, attracting the interest of domestic and foreign investors. The focus shifts to Nvidia’s earnings announcement on Wednesday, when a stellar report, combined with an upbeat outlook, will send major U.S. stock indexes higher. This also means that the level of disillusionment is fairly low, as any sign of easing demand or reduced investment appetite can impact risk appetite significantly, sending shockwaves through asset classes.
Meanwhile, gold continues to be driven by bouts of dollar strength, rising Treasury yields and shrinking real interest rates. When investors eventually refocus on tariffs and ballooning US debt, gold could rise again, but for now, it remains largely tied to stocks. Interestingly, the one-month correlation between gold and the S&P 500 rose to the highest level since October 2012, when gold was drawn into a three-year decline, losing about 40% of its value.
The Euro and the British Pound face different issues
With inflation indicators rising, and hawks appearing to have the upper hand at the European Central Bank, an interest rate hike in June looks inevitable, unless the US-Iran conflict is resolved fairly quickly, with the euro benefiting from broad dollar weakness.
ECB doves are focused on a potential economic slowdown, so a weak set of PMI numbers next week, showing for example a drop in the German manufacturing PMI below 50, will not be taken lightly by the dovs. However, with the ECB’s mandate for price stability and German services and manufacturing PMI sub-indices rising to multi-year highs in April, rate hike bets will remain supported even if the euro finds itself under selling pressure on expectations of a weak GDP performance in the second quarter.
The situation is much more complex in the United Kingdom. Prime Minister Starmer’s days in office appear to be numbered, with the likelihood of a more left-leaning Prime Minister taking office increasing daily, bringing back memories of the Truss market collapse. Long-term bond yields rose to their highest level in two decades, with 30-year bond yields above 5%, while sterling fell 2% against the dollar this week.
Meanwhile, despite satisfaction with GDP and production numbers in the first quarter and March, economic sentiment remains weak, especially with concerns about consumer spending. These sentiments will be tested next week, with a barrage of data for April and more specifically, the number of claimants, inflation reports and retail sales.
In particular, a jump in the CPI of about 4%, coupled with a weaker set of preliminary PMI surveys, which coincidentally are holding up very well as the April manufacturing survey rose to a four-year high despite an apparent acceleration in inflation, would deepen the division within the MPC ranks. Hawks are expected to become bolder about their intention to support a rate hike in June, with pound traders concerned about the growth outlook and political turmoil.
Endless pressure on the yen
After falling by five significant figures on April 30, the USD/JPY rose above the 158 level again, as investors react to Japanese officials’ weak approach to actual market intervention. It is understood that a sustained yen rise requires strong economic data and a realistic opportunity for the next policy tightening, both of which could improve next week. A strong first-quarter GDP report, along with another jump in the manufacturing PMI survey and more hawkish comments from Bank of Japan officials, could convince investors that a BOJ rate hike in June is more likely.
Canadian dollar outlook mixed, Australian dollar focused on Chinese data
Australian traders will be watching Chinese data on Monday for some much-needed signals that the Chinese economy has finally moved beyond a recent prolonged weak correction, although such signals are highly unlikely given broader economic tensions and the Reserve Bank of Australia’s minutes on Tuesday for hawkish signals to spur another AUD/USD rally.
Meanwhile, the Canadian dollar was on the decline in May, with focus shifting to the April CPI report on Tuesday and retail sales numbers on Friday. The initial Canadian dollar rally on a potentially strong upward surprise in inflation will fade if retail sales data indicate deterioration in domestic demand. Stagflation would complicate the Bank of Canada’s outlook, with the balance leaning toward lower interest rates if tariff developments are back in the spotlight.
