Key Highlights

• U.S. bombing of Iran nuclear sites changes the balance of risks
• The interplay between higher oil prices, trade deals and monetary policy is crucial
• Upcoming Iran response to U.S. actions, NATO summit and Powell's testimony highlight fiscal risks and growth challenges
• USD movements influenced by oil prices, rate cuts in Europe and hedging activities

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What you need to know

There is a cost to doing nothing: lost opportunities, lost momentum, lost confidence. Markets are like a hot summer day, when waiting can lead to dehydration and a sunburn, which for traders come in the form of lighter liquidity and more painful moves across markets. The U.S. actions over the weekend will be the start of a new course for markets. Some argue that nothing matters, the action defanged nuclear ambitions of Iran, others see this as a start to widening of the conflict. Correlations between the USD down and risk up have stopped working since the surprise events of June 13, when Israel began bombing Iran and they are now likely to continue. They have continued to fluctuate as U.S. data has been weaker, but bond yields are stuck as the Fed is in wait-and-see mode. The next logical risk is a reversal of the melt-up in U.S. equities. Being able to shrug off a wider conflict and higher oil prices will be difficult. The peak of confessional warnings on earnings and margins will come in the next two weeks, just as markets will be waiting for clarity on the U.S. involvement in the Iran-Israel and Russia-Ukraine conflicts and the number of deals to cross the line ahead of the July 9 reciprocal tariff deadline.

The surprise last week was the relative calm of markets despite the ongoing conflict between Israel and Iran, which caused WTI oil prices to climb 11% on the week to over $75bbl, while gold fell 2% and the U.S. dollar index rose 0.5%. The FOMC decision to hold rates steady wasn’t a surprise, but 10-year bond yields fell 3bp to 4.37%, while 2-year yields were off 5bp at 3.90%. The S&P 500 was -1% on the week, with VIX remaining close to 20%, while Brazil’s Bovespa index was flat despite a rate hike. The Nikkei rose 1.5% as the BoJ maintained rates and with a July hike in doubt. JPY was off 1% on the week. In FX, the biggest movers were ILS (+3.6%) and BRL (+0.5% on COPOM’s hike), while SEK was off 1.8% on the Riksbank’s cut and NOK was down 1.9% on the surprise easing by Norges. Although the SNB pushed rates to zero, CHF was off just 0.6%.

Economic data will force a rebalancing of risk ahead and set the course for hedging

_{EXHIBIT #1: U.S. ECONOMIC SURPRISES AND FINANCIAL CONDITIONS}

_{Source: BNY, Bloomberg}

_{EXHIBIT #2: U.S. DOLLAR CROSS-BORDER FLOWS – HOLDINGS AND SPOT FORWARD} 

_Source: BNY

Our take: The risk for lower USD has been slowed by higher oil prices in the last week. Hedging of USD slowed and reversed slightly. This isn’t likely to continue unless there is a larger movement in oil, more tightening of U.S. financial conditions (from higher rates) or more weakness abroad. The surprise rate cuts in Europe last week mattered to how USD trades as well. A higher USD adds to tightening U.S. financial conditions and the role of a two-week reprieve on action against Iran by President Trump likely means tariff concerns and the speed of trade deals will return as a focus – with EU and Japan talks unlikely to meet deadlines. The other focus will be on U.S. durable goods, core PCE and how FOMC Chair Powell spins U.S. economic conditions. Further data weakness will add to U.S. growth worries, which could clash with the Fed’s wait-and-see mode.

Forward look: Q2 rebalancing pressure will be important for the mix of trading risk next week as investors have to consider many conflicting factors, from inflation to growth linked to oil prices, tariffs, taxes and deregulation. The news agenda will provide significant clarity for all these factors and likely returns markets to home bias risk reduction. The trend for selling USD has been linked to this increased hedging – showing up clearly in our data and also in the BIS report. 

What we're watching

U.S.: Powell vs. other Fedspeakers, flash PMI, durable goods, core PCE and volatility

_{Source: BNY, Bloomberg}

Our take: With the June FOMC meeting behind us, attention will turn to the roster of Fedspeakers, who will resume their speaking engagements in earnest this week. Governor Waller on Friday kicked off the parade of speakers and was surprisingly dovish. Chair Powell testifies to Congress, and we’ll be listening for any contradictions in his likely more cautious, less prescriptive approach. Along with further tape watching in Iran and tariffs, the week could be set up for some volatility due to these factors. The shift in hard data shows up most clearly in retail and wholesale trade, clearly driven by tariffs, while the rise in household outlooks from credit and ongoing spending is a contrast – how Fedspeakers balance these will be important.

Forward look: Data-wise, the coming week promises a lot of information, with some of it likely to be potentially market moving. Housing prices, sales and mortgage applications could be interesting as we see a softening market and get a number of confidence surveys, both Conference Board consumer confidence and a few regional Fed PMIs. To us, the two most important prints will be durable goods orders (evidence on corporate capital spending) on Thursday and PCE on Friday. The latter is likely to be a comfortable report, given the positive trends we saw in CPI and PPI a few weeks ago.

In Canada, the week ahead is peppered with relevant data releases. CPI on Tuesday is a key print. The Bank of Canada continues to be concerned with elevated inflation, especially the core measures, and Governor Macklem recently hinted that concerns over tariff-induced inflation could keep the Bank reluctant to cut rates again any time soon, although two other releases this coming week will put that concern to the test. The Canadian establishment employment report is out on Thursday, and we expect it will show continued deterioration. GDP for April will also be released on Friday, and the labor and growth data could move the needle back in favor of cuts.

Tight policy in CEE persists as NATO spending supports flows

_{EXHIBIT #4: CEE CURRENCY HOLDINGS SINCE JANUARY 2024}

_{Source: BNY}

Our take: The Czech and Hungarian central banks (CNB and MNB, respectively) are both expected keep rates unchanged in their policy decisions this week. Consolidation of policy stasis by the ECB and Fed will leave very little room for the region’s central bank to ease further, even though that is the clear preference of policymakers, who worry about having excessively high rates heading into a period of growth deceleration. Nonetheless, labor market strength across the region is difficult to dislodge, especially with the lack of consistency on the fiscal front. Given the recent gains in oil prices, the region’s response in 2022 to energy supply issues will stoke unwelcome memories. Large-scale fiscal support such as the “anti-inflation shield” and mortgage repayment forbearance in Hungary led to a sharp reduction in realized inflation which was totally incongruent with supply and demand pressures at the time. These are tail risks for now, but it is the kind of political risk that has undermined flows into the region, which should be benefiting from not just high current real rates relative to Western Europe, but also from the investment gains from growing defense budgets among NATO economies, with a 5% of GDP expenditure target in focus for next week. Furthermore, domestic political developments have resulted in further concerns surrounding the growth outlook, as increased clashes with the EU could result in funding stress, which in turn will hurt currency performance while generating pass-through inflation.

Forward look: Our data show that there has been a sharp rise in the hedging of PLN since the election result. The currency was one of the best-held a year ago, but has totally flipped into materially underheld. Based on current fundamentals, we believe that there is a case for mean reversion and renewed opportunities for asset inflows as some of the political risks look overblown. Central banks will continue to anchor policy credibility, and we doubt CNB and MNB will signal material easing in upcoming meetings. If anything, we believe it would serve both central banks and the entire region well to align with the ECB and indicate that there shouldn’t be any need for additional rate cuts for now, subject to global trade developments and other exogenous risks. Fiscal policy must focus on two strands. The first is ensuring stable fund flows from the EU, and this is where Hungary and Poland will need to continue treading carefully ahead of the NATO summit, lest more difficult conversations with the EU arise over the bloc’s joint funds, especially in defense. Second, financial accounts in the region have strengthened materially over the past three years due to defense needs, but long-term plans for growth diversification require acceleration. We are concerned that the defense theme in Europe is now priced for perfection but economically and politically unsustainable over the longer term. Such flows have helped loosen the region’s financial conditions (another reason behind labor market tightness) and governments should also adopt the public investment-driven mantra to boost productivity, especially given demographic challenges. We continue to see CEE as an under-allocated region but acknowledge that a sustainable growth narrative is required for stronger flow redirection.

APAC: South Korea business sentiment, regional CPI and BoT

_{EXHIBIT #5: SOUTH KOREA SEEKS GROWTH BOOST FROM FISCAL STIMULUS}

_Source: BNY

Our take: In the Asia-Pacific region, the focus this week will be on South Korea, including the composite business survey index outlook, consumer confidence and inflation expectations, and the first 20 days of export growth. China data will be limited. Inflation releases from Malaysia, Singapore, Australia and Japan will also be in focus, but might be overshadowed by the recent acceleration of commodity prices. The South Korea May Composite Business Survey Index (BSI) and inflation expectations in consumer confidence releases will be closely watched. The focus will be on whether business sentiment can gain further upside momentum on the back of government fiscal measures. Indeed, South Korea sentiment for manufacturing sector had risen for five straight months to the highest since July 2024, while the non-manufacturing sector is at its highest level since November 2024. Further upside momentum is encouraging but sentiment remains well below the long-term average. We will be monitoring sentiment closely to gauge the effectiveness of the supplementary budgets of KRW 13.8tn and KRW 20.2tn passed in May and July this year. We will be looking for confirmation of export momentum in June, with South Korea’s first 20-day export data, following the strong rebound of daily average exports over 10 days at 15.0% y/y in June.

May inflation from Malaysia, Singapore and Australia is likely to drift lower as observed in the rest of the region. The market is likely to look ahead to a potential stabilization or reversal of trends following the acceleration in crude oil prices, which had surged from a low of $57.1 in early May to around $75 at the time of writing. The June CPI for Japan is likely to keep the BoJ on tightening alert but not be sufficient for the bank to pull the trigger until global uncertainty eases. Singapore May inflation will be a significant parameter for the Monetary Authority of Singapore (MAS) meeting in early July. It will be a tricky meeting for MAS, as Singapore’s NEER valuation have reached a new high in a policy-easing cycle, along with slowing growth and inflation momentum.

With respect to monetary policy, the Bank of Thailand is expected to maintain the status quo at 1.75% and leave open the option for further cuts if macro conditions deteriorate further. Beyond that, Japan’s upper house election on July 20 will be the top focus along with July policy meetings in Indonesia, Malaysia, South Korea, Singapore, Australia and New Zealand.

Forward look: We are constructive for Asia risk on the positive progress on trade and tariff negotiations but at the same time concerned about the negative impact from high crude oil and rising geopolitical risks. We see vulnerability in the currencies of net importing countries, notably THB, INR, KRW and PHP.

Bottom line

Investors won’t have the luxury of central bankers in wait-and-see mode as the next few weeks will force decisions about risk taking. The coming weeks will be pivotal as investors navigate conflicting factors such as inflation, growth, oil prices, trade tariffs and deregulation. The USD’s trajectory will be influenced by hedging activities and economic data releases, including durable goods orders and PCE. In Canada, CPI and employment data will test the Bank of Canada’s stance on inflation and potential rate cuts. For emerging markets, the week ahead is even more eventful:

• CEE: Tight monetary policy persists amid NATO spending, with central banks expected to maintain rates. Political risks could impact currency performance and inflation.
• APAC: South Korea’s business sentiment and fiscal stimulus are key focus areas, alongside regional inflation data. The Bank of Thailand is likely to maintain its current rate, with potential cuts if conditions worsen.
• LatAm: The Mexico central bank is expected to ease 50bp, with MXN unlikely to enjoy any benefits. Similarly, the Colombia central bank is expected to hold with little joy for COP, even with higher oil prices. The regional focus remains on tariffs, politics and growth risks.

Investors should remain vigilant as geopolitical tensions and economic data releases shape global market dynamics, influencing asset allocation and risk management strategies into the end of Q2.

Calendar for June 23 – 27

Central bank decisions

Hungary, MNB (Tuesday, June 24) – Hungary’s central bank is expected to hold its base rate at 6.50% on June 24, marking the ninth consecutive meeting without a change. May headline inflation rose to 4.4% y/y from 4.2% in April, while core inflation eased slightly to 4.8%, both remaining above the 3% ±1pp target. The Monetary Council has maintained a cautious tone, reiterating that restrictive conditions must be preserved to anchor inflation expectations. Governor Mihály Varga recently warned that the fight against inflation is not over and highlighted the risks posed by external volatility and tax-related price pressures. Market pricing reflects expectations that the MNB will stay on hold through mid-year, with only gradual easing priced in for late 2025.

Thailand, BoT (Wednesday, June 25) – We expect the Bank of Thailand to keep its policy rate unchanged at 1.75% on June 25, while leaving the door open for further cuts if macroeconomic conditions deteriorate. Weak asset performance, a softening growth outlook and baht strength argue for additional easing, but the BoT is likely to remain patient and monitor the implementation of government stimulus measures, tariff uncertainties, and geopolitical developments in the Middle East. Notably, the current BoT governor’s term ends in September, with candidate selection and submission to the Ministry of Finance scheduled to begin in early July.

Czechia, CNB (Wednesday, June 25) – Czechia’s central bank is expected to hold its two-week repo rate at 3.50% on June 25, following a 25bp cut in May. Headline inflation rose to 2.4% y/y in May from 1.8% in April, driven by food and tobacco prices, while core inflation remains elevated, with market services inflation at 4.6%. Recent board commentary has turned more cautious, with Jan Procházka noting that the easing cycle is nearing its end and highlighting persistent price pressures in services. The koruna has stabilized in recent weeks, and market pricing reflects expectations of a pause. Further cuts are likely to depend on sustained disinflation in core components and services.

Mexico, Banxico (Thursday, June 26) – Mexico’s central bank is expected to cut its policy rate by 50bp to 8.00% on June 26, marking a fourth consecutive half-point reduction despite a recent uptick in inflation. Headline inflation rose to 4.42% y/y in May, while core inflation climbed to 4.06%, both above the 3% ±1pp target. Deputy Governor Heath has suggested it may be time to pause further cuts until inflation shows a clear downward trend, but most of the board still views weak domestic growth and a stable peso as justification for easing. Market consensus supports a 50bp cut, with future moves expected to depend on sustained disinflation, though we note that trade considerations are also moving up the agenda again.

Colombia, BdlR (Friday, June 27) – Colombia’s central bank is expected to hold its policy rate at 9.25% on June 27, following a 25bp cut in May that was supported unanimously by the board. Headline inflation stood at 5.05% y/y in May, well above the 3% target, with elevated price pressures in housing and regulated services offsetting easing in food inflation. Governor Leonardo Villar has reiterated a cautious and gradual approach, stating that further easing will depend on unambiguous evidence of continued disinflation. While the Colombian peso has remained stable, fiscal concerns persist. Market expectations point to a pause this month, with the bank maintaining a restrictive stance while monitoring inflation convergence.

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Event Calendar

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