Australian Dollar Recovery Blunted by Inflation Undershoot

Economic

Summary:

The Australian Dollar could be higher, were it not for soft domestic statistics.

A supportive global backdrop met encouraging news for Australians as the monthly inflation survey surprised to the downside in May.

Headline inflation dropped from 2.4% year-on-year to 2.1%, and the consensus forecast was for a fall of 2.3%. The ABS meanwhile reported trimmed mean inflation - which the Reserve Bank of Australia watches closely - fell to 2.4% from 2.8%.

Services inflation recorded a decline from 4.1% to 3.3%, having been on an upward path in recent months. Falling services inflation means the 'stickiness' in headline inflation is set to recede.

This good news for ordinary Australians is, however, not a helpful development for those wanting a stronger currency. Australian Dollar Recovery Blunted by Inflation Undershoot_1

Australian Dollar Recovery Blunted by Inflation Undershoot_1

The monthly inflation measure indicates a softer quarterly reading in the pipeline, that can allow the Reserve Bank of Australia to be more confident that it can afford to cut interest rates further.

Lower rates down the road mean a softer Australian Dollar now.

"There is little reason for the RBA to not lower rates further in July. A cash rate at 3.60% would still be modestly restrictive, and the labour market appears to be softening a little," says David Forrester, FX Strategist at Crédit Agricole.

The Pound to Australian Dollar exchange rate reflects this, as it is only lower by 0.10% on the day at 2.0958, and we would have expected a more substantial move given the improved sentiment amongst the world's investors following the Iran-Israel ceasefire.

The Euro to Aussie Dollar is down 0.15% at 1.7861, and against the U.S. Dollar, the Aussie is up on the day at 0.6497.

Australian Dollar Recovery Blunted by Inflation Undershoot_2

Above: GBP/AUD (top) and AUD/USD.

"For AUD/USD, the soft inflation data will keep it locked in its 0.6350-0.6550 range. While the Australian rates market was already aggressively priced for further rate cuts meaning soft inflation will not be much of a drag on the exchange rate, AUD/USD likely needed strong inflation data to push it out of the top of its range," says Forrester.

The Aussie Dollar rebounded over the past 24 hours, helped by the ceasefire in the Israel-Iran conflict that means a series of worst-case outcomes for the global economy is set to be avoided.

The recovery in stock markets indicates an improved morale amongst traders, which naturally supports the Aussie. However, the domestic data looks to be denting its rebound prospects.

Source: Poundsterlinglive

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Michelle

Economic

Forex

U.S. Federal Reserve Chair Jerome Powell resumes two days of Congressional testimony on Wednesday when he appears before the Senate Banking committee after scrutiny before a House panel the day before that focused on the Fed's concerns the Trump administration's tariff plans will raise inflation.

The Senate session begins at 10 a.m. with Powell expected to deliver the same message he presented to the House Financial Services Committee that even with recent inflation more moderate than expected, the central bank expects rising import taxes will lead to higher inflation beginning this summer. He is also expected to reiterate that the Fed won't be comfortable cutting interest rates until it sees if prices do begin to rise and whether that process shows signs of becoming more persistent.

"We should start to see this over the summer, in the June number and the July number...If we don't we are perfectly open to the idea that the pass-through (to consumers) will be less than we think, and if we do that will matter for policy," Powell said on Tuesday. “I think if it turns out that inflation pressures remain contained we will get to a place where we cut rates sooner than later...I do not want to point to a particular meeting. I don't think we need to be in any rush," particularly given a still-strong labor market and so much uncertainty about the impact of the still-unresolved tariff debate.

Tariffs have already risen on some goods, but there is a coming July 9 deadline for higher levies on a broad set of countries - with no certainty about whether the Trump administration will back down to a 10% baseline tariff that analysts are using as a minimum, or impose something more aggressive.

The Fed has held its benchmark interest rate steady in the 4.25% to 4.5% range since December, despite demands by President Donald Trump for immediate, and deep, rate cuts.

Economic projections released by the Fed last week showed policymakers at the median do anticipate reducing the benchmark overnight rate half a percentage point by the end of the year. But within those projections is a clear divide between officials who take the inflation risk more seriously -- 7 of 19 policy makers see no rate cuts at all this year -- and those who feel any tariff price shock will be less severe or quickly fade. Ten of the 19 see 2 or more rate reductions.

Investors currently expect the Fed to cut rates at its September and December meetings, but hold rates steady at its next meeting on July 29-30.

Source: Yahoo Finance

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Adam

Stocks

The three major US indices that I cover here at FX Empire all look as if they are trying to rally in the early hours of Wednesday, as we continue to see momentum push the stock markets in the United States higher.

NASDAQ 100 Technical Analysis

The NASDAQ 100 has been gaining ground in early pre-market trading on Wednesday as we continue to see this market break out and perhaps go screaming to fresh new all-time highs. The market has bounced rather significantly, so it is a little extended. But let’s be honest here, if there’s one index that can really take off in an impulsive move, it’s the Nasdaq 100. Short-term pullbacks should continue to be buying opportunities in what looks to be like a bit of a runaway train here.

Dow Jones 30 Technical Analysis

The Dow Jones 30 tried to rally a bit, but it looks like it’s pretty flat in early market trading as we are hanging around the crucial 43,000 level. If we can take off to the upside, the 43,750 level would be the next target. And quite frankly, this is an index that I do expect to go higher given enough time. After all, this is a market that is knocking on the door of making a major breakout. And really, if the other indices do so, then the Dow Jones 30 should follow.

S&P 500 Technical Analysis

The S&P 500 is rallying as well as it looks like we are breaking out of this range and getting ready to go looking at the all-time high at 6,150. This is a market that, right along with the other ones, seems to be finding a reason one way or another to go higher. And you just simply cannot argue with momentum. Momentum is one of the most important parts of a market, and we most certainly have plenty here. Short-term pullbacks should end up being buying opportunities in a market that has been strong for several months now and now looks as if it’s breaking away from the previous grind.

Source: fxempire

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Warren Takunda

Economic

Middle East Situation

It is not yet clear whether the conflict between Israel and Iran is really at an end, warned many analysts after the US announced a ceasefire on Tuesday.

On Wednesday morning, the truce appeared to be holding after earlier violations, although investors kept their eyes on the region — with oil prices remaining high.

Reignited tension in the region could push up these prices further, leaving China and Europe vulnerable to supply disruptions — good news for Russia.

“The biggest losers would be continental Europe and China, both heavily reliant on imported energy and lacking domestic buffers,” said Professor Guido Cozzi, chair of macroeconomics at the University of St. Gallen, before the ceasefire was announced. “They would face rising costs, slower growth, and heightened inflation without any upside.”

But peace in Iran, along with the countries in the Persian Gulf, is key for the entire global economy as the region produces one-third of the world’s oil.

Iran alone provides 10% of China’s imported oil and largely controls the critical Strait of Hormuz waterway, through which one-fifth of the world’s oil passes.

Iran’s economy and its key trading partners

Iran’s Gross Domestic Product (GDP) was worth a little over $400 billion (€345bn) in 2023, according to the World Bank, making up 0.38% of global GDP.

While this total may not seem significant, the country is an important player when it comes to energy supplies.

Iran sources a large amount of its income from oil, and the country was the fourth-largest crude oil producer in OPEC, the organisation uniting the biggest oil-producing and oil-dependent countries, in 2023. It was also the third-largest natural gas producer in the world in 2022, according to the US Energy Information Administration (EIA).

Despite Western sanctions on Iran, some linked to its nuclear programme, Tehran has been working on securing its global trade position.

Iran’s main trading partners include China, Russia, Turkey, India, Pakistan and its close neighbours, including Iraq and the UAE.

According to Chris Weafer, chief executive of macro-advisory, a Eurasia-Gulf based business consultancy: “60% of the value of exports is oil and about 12% is chemicals and plastics, 8% is iron and ores and 5% is fertilisers.”

Oil exports are largely going to China, amounting to “approximately 1.7 million barrels per day,” Weafer told Euronews Business.

China’s crude oil imports are estimated to amount to more than 11 million barrels per day, according to the EIA. The federal agency also notes that Western sanctions against Iran should officially stop China from importing Iranian oil. Despite this, crude oil cargos from Iran are often relabelled as if they were from Malaysia, they noted.

“Any major disruption of Iranian oil supplies would leave China scrambling to find replacements,” said Gaurav Ganguly, chief European economist at Moody's Analytics. He added that Iran is also a major exporter of liquefied petroleum gas (LPG) to China, which is essential for the plastics industry. “This leaves China vulnerable on multiple fronts,” he said.

If China’s economy staggers, the global ecosystem does so too. The country’s domestic consumption provides the largest market for many Western companies, and its manufacturing is essential to the global economy.

However, Iran’s main trading partners are working on diversifying their sources of energy, hoping to find themselves less vulnerable in times of crisis in the Middle East.

“China will continue to increase its reliance on energy from Russia and Central Asia to reduce its vulnerability linked to instability and American intervention in the Middle East,” said Matt Gertken, BCA Research’s chief geopolitical strategist. He added that “India will also turn to Russia and increase imports from the Americas — and eventually resume imports from the Middle East, including Iran.”

Trade is increasing with Eurasian countries, including Russia

China's increasing reliance on Eurasian supplies is not the only benefit for countries like Russia. Iran itself has increased trade with countries in Eurasia.

“Earlier this year Iran formally signed a free trade agreement with the Eurasian Economic Union (EaEU),” Weafer said, adding that trade with the member states, (Belarus, Russia, Armenia, Kazakhstan and Kyrgyzstan) has been growing steadily for years. There are more plans to expand it with regards to fruits, seeds, vegetables and some manufactured goods, he said.

The trade with Central Asia and Russia has also grown because of expanding rail networks across Central Asia and the Caucasus. This has allowed Iran to start diversifying its trade mix away from oil and gas dependency to expand its trade partnerships.

It also allows countries in Central Asia, such as Uzbekistan, to access a Gulf port, a quicker entry point to world markets.

“This should continue unless the rail and port infrastructure are targeted and damaged,” added Weafer.

Russia would be in a particularly favourable situation should the global oil flow be disrupted, he said. “The world market will need every barrel of Russian oil and every ton of Russian LNG it can get.”

What are the implications for Europe?

Russia could even see European demand increase slightly if there is a major shock to the oil and gas market, according to experts.

As Europe is also dependent on the natural gas from the Gulf region, “Europe faces a new source of energy supply insecurity on top of the breakup with Russia over the Ukraine war,” said Matt Gertken, BCA Research’s chief geopolitical strategist, before the ceasefire was announced.

It is possible that the EU will “reduce the stringency of sanctions enforcement on Russia by incrementally accepting more Russian natural gas, albeit not to pre-war levels”, he added.

If the crisis reignites around Iran, pushing oil and gas prices up again, Europe could also increase energy imports from the Americas, a less controversial solution than sourcing fuel from Russia.

“The most immediate impact on Europe will be a rise in inflation,” said Gaurav Ganguly, chief European economist at Moody's Analytics. A sustained rise in energy prices could “erode already fragile confidence in Europe, and central banks would be more likely to raise interest rates”.

Other implications on the global and regional economy

Globally, a rise in energy prices directly affects industries including logistics and transport sectors. This would trickle down to other businesses, making their operations more expensive. Eventually, consumers would feel the impact by seeing the cost of energy and other goods and services rise. Unemployment may also tick up if businesses are forced to cut back on hiring due to high costs.

And it is not just oil and gas markets that would feel the strain. The UAE port of Jebel Ali is one of the busiest in the world and a key hub connecting Asia, Europe and Africa.

“Supply chains could come under pressure, and shipping costs would rise if vessels are forced to find alternatives,“ Ganguly said.

The aviation sector in the region also faces pressure from prolonged disruptions, longer flight times and a loss of passenger volume. Tourism, which provides more than 11% of the region’s GDP, according to the Statistical Centre for the Cooperation Council for the Arab Countries of the Gulf, might also be affected.

If the Gulf region is exposed to an extended crisis, it could also hit the property sector, which could trigger a broader economic decline. If this is coupled with a slower flow of foreign direct investment into the region, that poses a further threat to the region’s economy.

“In short, there is a lot to lose,” Ganguly said.

Source: Euronews

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Glendon

Economic

Stocks

U.S. stock futures were flat on Wednesday, as a ceasefire between Israel and Iran appeared to be holding and investors awaited more comments from Federal Reserve Chair Jerome Powell.

The Nasdaq 100 closed at a record high on Tuesday and all three major indexes gained more than 1% as the de-escalation in Middle East hostilities supported risk sentiment. The benchmark S&P 500 indexwas less than 1% below its all-time peak.

Despite isolated violations of the ceasefire brokered by U.S. President Donald Trump a day earlier, investors remained optimistic that the truce between the two warring nations would last.

"So a lot of our major concerns, at least for right now, shifted into neutral as compared to being headwinds ... that puts this in a place where we'll take a wait-and-see attitude," said Art Hogan, chief market strategist at B Riley Wealth.

"We've heard what Jerome Powell said at Capitol Hill and will likely repeat that today. We get the sense that the Israel and Iran situation is going to de-escalate from here."

In the second day of Powell's congressional testimony, scheduled at 10:00 a.m. ET, investors will look for any hints on the central bank's monetary policy path.

This comes a day after Powell emphasized the Fed's wait-and-watch approach to interest rates as tariff-led price pressures kick in. However, he also said a lower-than-expected inflation reading or weakness in the labor market would push the central bank to cut sooner.

Meanwhile, a surprise deterioration in U.S. consumer confidence on Tuesday kept the door open for an immediate rate cut in July.

Money market moves show traders are pricing in about 60 basis points of rate cuts by the end of 2025, with a 70% chance of a 25-bps rate cut in September, according to CME Group's FedWatch tool.

At 07:06 a.m. ET, Dow E-minis (YMcv1) were down 37 points, or 0.09%, and S&P 500stock futures were up 0.02%. Nasdaq 100 E-miniswere up 41 points, or 0.18%.

Shares of delivery giant FedExfell 5.5% in premarket trade after the company forecast quarterly profit below estimates as tariffs weighed on global demand. Rival UPSdropped 1.1%.

Investors were also watching developments from a meeting of NATO leaders, as European allies gathered to pledge a big increase in defense spending at a short summit tailor-made for Trump.

Trump, who reiterated his commitment to the alliance, has often threatened not to protect NATO members if they fail to meet spending targets.

The Commerce Department's final take on first-quarter GDP is due on Thursday, while Friday's Personal Consumption Expenditures (PCE) report will help investors ascertain the economic effects of Trump's tariffs that have kept global markets on edge since the start of the year.

General Millsshares dipped 1.8% after the packaged food maker forecast annual profit below expectations.

U.S.-listed shares of cybersecurity firm Blackberryjumped 9% after the company raised its annual revenue forecast citing steady demand amid growing online crimes.

Source: TradingView

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Warren Takunda

Economic

London stocks had pared earlier gains to trade flat by midday on Wednesday as investors exercised some caution amid the fragile ceasefire between Israel and Iran.

The FTSE 100 was steady at 8,760.34.

Neil Wilson, UK investor strategist at Saxo Markets, said investors "are pausing to see what happens next".

"Israel and Iran seemed to be complying with a US-brokered ceasefire agreement after Trump’s firm response to reports of initial breaches by both parties," he said.

"Crude has wiped out its geopolitical premium and looks like it will trade at best sideways now after plenty of technical damage. The defence theme looks like it's going to run and run and Babcock is testament to that as Europe signs up to spend LOTS more.

"Certainly, optimism was never really all that diminished throughout the 12-day conflict so the snapback is inherently more muted. The worst of the negative impact from fears about tariffs, US immigration and the Middle East seem to be behind us, and we are seeing earnings expectations rising, whilst the Federal Reserve seems to be erring more closely towards a cut."

In equity markets, defence engineering company Babcock surged to the top of the FTSE 100 after saying it expects to hit its underlying operating margin of 8% a year early and increasing its medium-term target in a 'new era' of weapons spending amid global political instability.

Babcock also posted a sharp jump in annual operating profit to £364m from £241.6m a year earlier and announced a £200m share buyback.

Russ Mould, investment director at AJ Bell, said: "Shares in defence and engineering contractor Babcock have more than doubled year to date so a positive set of results was needed for investors to sustain their enthusiasm.

"Largely that’s what they got - the numbers themselves were strong but so too was the accompanying rhetoric as the company talked about a ‘new era for defence’. A meaningful increase in medium-term guidance won’t have hurt either."

He added: "Some eyebrows may be raised at the decision to launch the company’s debut share buyback when its share price is at its highest level in more than a decade and not a million miles off its all-time high from 2014. Although, in fairness, this is merely following the recent trend for UK companies to return an increasing proportion of the capital they dole out to shareholders this way."

Online retailer THG rallied as it said that second-quarter trading has been "much improved" across both its beauty and nutrition units, with the overall group returning to constant currency revenue growth.

Warehouse REIT advanced as it agreed to be taken over by bigger peer Tritax Big Box REIT for £485m. Tritax, which outbid an earlier proposal by Blackstone, was in the red.

Burberry racked up strong gains as Morgan Stanley and HSBC lifted their price targets on shares of the luxury fashion brand.

Advertising firm WPP was hit by a downgrade to ‘underweight’ at Barclays, while Moonpig fell ahead of full-year results on Thursday.

Source: Sharecast

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Michelle

Forex

Political

The dollar pushed higher against the yen but struggled to regain ground against other currencies on Wednesday as investors decided to take on more risk following a fragile ceasefire between Israel and Iran.

Markets regained some stability, with an index of global stocks hitting a record high overnight as the truce brokered by U.S. PresidentDonald Trumptook hold betweenIranand Israel.

The long-time Middle East adversaries signalled the air war between them was over, at least for now, after Trump publicly scolded both sides for violating a ceasefire he announced.

Investors heavily sold the dollar following the news, having piled into the U.S. currency after pouring into the safe-haven currency during the 12 days of war between Israel and Iran that also saw the U.S. bomb Iran's uranium-enrichment facilities.

The eurowas mostly stable at $1.1605, still near its highest since October 2021, as was sterling, which held at $1.3608, near its highest since January 2022.

While the ceasefire appeared precarious, investors for now seemed to welcome any reprieve.

"The market is complacent about some of the downside risks," said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia.

"The thing I get is this issue is not over, which means it could come back to be a driver of commodity prices and currency markets again."

In other currencies, the Swiss franc, which scaled a 10-1/2-year high on Tuesday, retreated, allowing the dollar to gain 0.16% to trade at 0.8064 francs.

The dollar made most headway against the yen, rising 0.6% to 145.74.

Some Bank of Japan policymakers called for keeping interest rates steady for the time being due to uncertainty over the impact of U.S.tariffson Japan's economy, a summary of opinions at the bank's June policy meeting showed on Wednesday.

Against a basket of currencies, the dollarrose 0.1% to 98.1.

On Tuesday, Federal Reserve Chair Jerome Powell stuck to his cautious approach, reiterating that the central bank was in no rush to ease rates at his semi-annual testimony to Congress. But this did little to shift market expectations of an 18% chance the Fed could cut in July, according to the CME FedWatch tool.

A number of Fed officials have spoken in the last week and their views indicated some divergence among policymakers.

Both Michelle Bowman and Christopher Waller seemed to lean in favour of a summer rate cut, while others, such as Fed Governor Michael Barr, have signalled they believe the economy is holding up well enough not to require any for now.

Commerzbank strategist Michael Pfister said it was "increasingly clear" policymakers were no longer united on future monetary policy, and discussions over rate cuts could surface as early as July.

"In such a scenario, expectations of interest rate cuts are likely to gather pace again," he said.

"If the consensus within the FOMC continues to crumble in the coming weeks, this figure is likely to rise. This is not a good sign for the U.S. dollar."

A raft of weaker-than-expected U.S. economic data in recent weeks has also supported expectations for Fed cuts this year, with futures pointing to nearly 60 basis points worth of easing by December. (0#USDIRPR)

Data on Tuesday showed U.S. consumer confidence unexpectedly deteriorated in June as households grew increasingly worried about job availability, another indication that labour market conditions were softening.