Markets are reacting to a combination of international events and important economic news.

Here's a brief look at what's driving the day:

Geopolitical Tensions Keep Markets on Edge:

• The ongoing conflict between Israel and Iran continues to create uncertainty for investors.
• This has led to a "risk-off" mood, causing stock markets to decline.
• The US Dollar has, however, found some support due to its traditional safe-haven status in times of global stress.
• President Trump held meetings with his national security team, indicating the seriousness of the situation.

Key Economic Data & Central Bank Watch:

• US Retail Sales were surprisingly weak. This suggests that American consumer spending might be slowing down, possibly due to the ongoing uncertainty around tariffs.
• UK Inflation (CPI) figures came in exactly as expected. This data supports the idea that the Bank of England (BoE) might cut interest rates a few times over the year, rather than just once.
• The US Federal Reserve (Fed) is widely expected to keep interest rates unchanged at their meeting this week. We'll also get their new "dot plot," which shows where each Fed official thinks interest rates will be in the future. This gives us clues about their plans for the economy.

In essence, global political tensions are making investors cautious, while key economic reports from the US and UK are providing fresh insights into consumer health and potential central bank actions.

Market Recap:

Yesterday's market session saw some interesting shifts, primarily driven by global political developments and a mix of economic signals:

US Dollar's Unexpected Strength: The US Dollar demonstrated broad strength across currencies, even surprising many given the weaker-than-expected US retail sales figures for May. This suggests other factors were at play, likely:

• Trade Talk Optimism: Comments from EU President Ursula Von der Leyen indicated progress in EU-US trade talks, with a July 9th deadline agreed upon. Positive steps in international trade can often bolster the dollar.
• Middle East Tensions Fuel Safe Haven Demand (Overnight): The dollar's gains extended overnight following President Trump's meeting with his national security team regarding the Middle East conflict. This fueled speculation about potential US involvement, leading investors to seek the dollar's traditional "safe haven" status.

Sterling's Dip Ahead of Key Data: The British Pound declined across the board yesterday. This happened despite earlier news of a potential US-UK trade deal, which is expected to offer a modest positive impact on the UK economy (reducing tariff shock by 3-7% with a minor 0.1% GDP gain). Sterling's weakness was largely in anticipation of this morning's crucial UK inflation (CPI) numbers, with markets bracing for what that data might reveal about the Bank of England's future interest rate path.

In summary, the US Dollar found strength from a blend of positive trade signals and renewed geopolitical concerns in the Middle East, overriding softer domestic economic data. Meanwhile, the British Pound faced headwinds ahead of key inflation figures, outweighing minor positive trade news.

Today’s Market Update:

Today's market activity is shaped by a mix of UK economic data, anticipated central bank signals, and ongoing geopolitical concerns.

UK Inflation Update:

• The UK's Consumer Price Index (CPI) for May showed a smaller-than-expected decline, coming in at 3.4% (from 3.5% in April). Core CPI and services CPI also eased.
• What it means: This data, despite a slight moderation, is broadly in line with market expectations for a gradual pace of interest rate cuts by the Bank of England (BoE) this year. Sterling saw a marginal rise following the data release, suggesting it supports the BoE's current stance. Current expectations are for rate cuts in September and December.

US Federal Reserve Meeting Tonight:

• The Fed is widely expected to keep interest rates unchanged at their meeting.
• What to watch for: The focus will be on their updated "dot plot" (individual forecasts for future interest rates) and any comments from the Fed, particularly regarding geopolitical tensions. Given the current global situation, the Fed may be cautious about signaling imminent rate cuts, despite recent softer US inflation data.
• Market impact: Markets are currently pricing in an October rate cut and a high chance of another in December. Any indication from the Fed that they might push back on a second cut could strengthen the US Dollar.

Global Equity Markets & Risk Sentiment:

• Global stocks declined yesterday. This "risk-off" move followed President Trump's early departure from the G7 summit and reports suggesting potential US direct involvement in the Israel-Iran conflict.
• Oil prices rose over 4% to around $76 a barrel, reflecting renewed concerns about supply.
• The US Dollar strengthened as investors sought its safe-haven qualities amidst the heightened uncertainty.

US Retail Sales Weakness:

• US retail sales for May fell more than expected (-0.9%). This decline was notably driven by drops in auto sales, food services, and building materials.
• What it means: This weaker-than-expected consumer spending data aligns with recent softer inflation figures and suggests ongoing tariff uncertainty might be impacting consumer confidence.

In essence, while UK inflation data provides some clarity for the BoE's path, global markets remain sensitive to Middle East developments. All eyes are now on the Fed's decision tonight, which will offer crucial insights into the US interest rate outlook amid these complex conditions.

18th June 2025

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