Oil and buck bid again, while Tech rebounds

* President Trump vows to bomb Iran’s Pickaxe Mountain soon

* USTR hints new Trump tariffs coming on dozens of countries

* Yen weakens to fresh long-term low, GBP uneasy about fiscal discipline

* Semiconductors jump and help Tech bounce ahead of GOOG earnings

FX: USD rose for a fourth straight day as Middle East tensions continued to keep crude elevated and back above $90, while boosting Treasury yields to two-month highs. There’s now a 21% chance of a 25bps Fed rate hike at the end of the month meeting. The late June top sits at 101.80. The US supposedly want a longer ceasefire than the 10-days proposed by Iran and partial navigation of Hormuz, while Houthi militants are threatening a blockade of Saudi Arabia in the Red Sea. Interestingly, FX volatility is at low levels, on some measures last seen in 2022. That period was followed by a strong surge on the back of Fed tightening and Ukraine turmoil.

EUR outperformed most of its peers as the major printed an ‘inside day’ where its high and low are inside Monday’s range. Interest rate differentials have provided the single currency with support, with roughly 45bps of rate hikes priced in by year-end, and virtually a fully priced quarter point move for the September ECB meeting. Initial support is 1.1410 and then 1.1378.

GBP underperformed all its peers except for the yen. UK jobs data was mixed but no real market mover. Markets got to assess the potential for higher government spending and how the new Chancellor will finance it. Healey was a surprise choice, the former Defence Secretary who resigned over insufficient military spending, though is not seen as a left leaning pick. But the UK coffers are relatively empty, and it seems it will be tough to deliver much while the bond market vigilantes watch on. Indeed, one of PM Burnham’s first measures was essentially an unfunded removal of VAT on electricity bills, so not a great fiscal start. Cable has dropped through the 200-day SMA at 1.3395 and is touching the 50-day at 1.3371. Below is the May low at 1.3302 and early June bottom at 1.3305.

JPY broke to the upside and past the recent peak at 162.83, which we wrote looked likely on Monday. Prices are through 163 and multi-decade highs. No doubt this renewed yen weakness will grab the MoF’s attention with more verbal intervention a given. But stemming the major uptrend seems exceptionally tough with oil prices elevated and Treasury yields pushing higher. Support is strong around 162.

US stocks: The S&P 500 added 0.89% to close at 7,509, the Nasdaq closed up 1.93% at 29,155 and the Dow Jones settled higher by 0.74% at 52,230. Only two sectors were in the red, Consumer Staples and Communication Services, while   Tech was the clear winner, with Energy and Healthcare next best. Chipmakers rebounded some more after last week’s sell-off with Sandisk jumping 14.2%, Micron up 12.2% and Nebius soaring 18.7%, the latter after Nvidia disclosed it held a 9.3% passive stake.  Intel climbed 8.6% on reports of layoffs to become ‘more focused and efficient’. 3M soared over 8% after the industrial conglomerate reported better than expected Q2 results while it raised its annual profit outlook. GM jumped 4% after also beating.

Asian Stocks: Futures are mostly green. APAC stocks were also mixed after the muted Wall Street handover. The ASX 200 lacked firm direction with no new drivers. The Nikkei 225 rallied on its return from holiday with some bargain hunting.  The Shanghai Comp and the Hang Seng were mixed with range bound price action.  

Gold moved higher as prices bounced off $4,000. Silver jumped too, as bulls pushed above $56 with a third consecutive day of gains.

Day Ahead – UK Inflation

Consensus predicts the headline rate at 2.7% from 2.8%, core at 2.5% from 2.6% and all-important services at 3.5% from 3.7%. Lower petrol prices should help drag the headline lower. But CPI may rise in July as household energy bill hikes kick in. June’s PMI showed that while price pressures were elevated, some of the Middle East related pressure had started to moderate given the MoU signing; however, that has been unwound by the latest flare up in tensions between the US and Iran.

As a reminder, the BoE’s June view is for a headline print of 3.1%, though given the uncertainty currently seen around the Middle East situation and recent energy upside, a lower reading is likely to reinforce the BoE on-hold narrative. Market pricing may moderate marginally from the current 36bps implied end-2026 rate hikes. Conversely, an unexpected pick-up from the prior rate would fan the growing hawkish voices at the BoE, with MPC members Greene and Pill hawkish dissenters and Mann’s ‘activist’ language potentially indicative of her not being too far from a hike vote.

Chart of the Day – GBP/JPY upside break pauses

GBP/JPY broke above the long-term resistance zone around 215.89 in early July, with another push above the April top at 216.59 soon after. But prices have pulled back modestly in the past few sessions, with four days of selling, helped in part by range-bound equity markets. Tech valuations remain a hot talking point with Google earnings on Wednesday front and centre, especially the free cash flow metrics. Broadly, a more benign environment of softer energy prices and no further Fed tightening should push this popular pair higher again. Any BoE hiking seems contingent on core inflation staying high this summer and the hawks gaining the upper hand on the MPC. The yen is undoubtedly very cheap on many longer-term valuation metrics, but a catalyst for a reversal appears tough in the current environment.