This morning's markets are grappling with a mix of international tensions and critical central bank signals.

Here's a quick rundown:

Key Headlines

Geopolitical Jitters (Middle East):

• The conflict between Israel and Iran continues to fuel uncertainty, causing stock markets to fall.
• The US Dollar has, however, gained strength as investors look for "safe havens" during this volatile period.
• Reports suggest US officials are preparing for a potential strike on Iran, adding to the tension. President Trump also met with his national security team, signalling the seriousness of the situation.

Central Bank & Economic Updates:

• US Federal Reserve (Fed) Decision: The Fed kept interest rates unchanged, as expected. However, they've increased their inflation forecasts, suggesting they see prices staying higher for longer. This might make them less likely to cut rates soon, which could support the dollar. We also got their "dot plot" (a look at where officials think rates are headed), which showed varied opinions on future cuts.
• UK Inflation (CPI): UK inflation figures for May dropped slightly less than anticipated. This result supports the idea that the Bank of England (BoE) might opt for a gradual series of rate cuts (e.g., one cut per quarter) rather than more aggressive action. Sterling saw a small gain following this news.
• US Retail Sales: US retail sales for May were surprisingly weak, falling more than expected. This indicates that American consumer spending might be slowing, possibly due to concerns about tariffs.

In short, escalating geopolitical risks are making investors cautious, while central banks are navigating inflation concerns and varied economic data.

Market Recap:

The US Federal Reserve (Fed) meeting yesterday provided key insights into their outlook, which is influencing the US Dollar's recent performance.

 Here's what you need to know:

• Fed Holds Rates, Raises Inflation Concerns: As widely anticipated, the Fed kept interest rates unchanged. However, Chairman Powell highlighted increased inflation expectations, partly attributing this to the impact of tariffs. This signals that policymakers will be closely monitoring how rising prices affect consumer behaviour.

• Split Views on Future Rate Cuts: While the Fed's "dot plot" (a guide to individual officials' rate projections) still indicates two potential rate cuts this year, there's a clear division among members. A significant number of officials (7 out of 19) foresee no rate cuts at all this year, highlighting internal debate and uncertainty about the economic path ahead.

• Dollar Gains: Following the Fed's update, the US Dollar strengthened against other major currencies. This is likely due to the higher inflation forecasts and the mixed signals on future rate cuts, which suggest the Fed may not be as quick to ease monetary policy as some markets had hoped.

In summary, the Fed's recent communication underscores their vigilance on inflation, even as internal views on future rate cuts remain divided. This cautious stance by the US central bank has provided support for the US Dollar.

Today’s Market Update:

Markets have opened cautiously today, with global events and significant central bank activity shaping the sentiment.

Geopolitical Concerns Drive Caution:

• Reports indicate the US is preparing for a possible strike on Iran as early as this weekend, intensifying the Middle East conflict. This has led to a "risk-off" mood in global equity markets.
• The US Dollar and oil prices have seen gains as investors seek safety amid these escalating tensions.
• European foreign ministers are reportedly set to hold nuclear talks with Iran tomorrow, offering a diplomatic counterpoint to the military preparations.

Bank of England Decision Today:

• All eyes are on the Bank of England's (BoE) interest rate decision later today. No rate cut is expected.
• What to watch for: Markets will be looking for any "dovish tilts" or signs that the BoE might be more inclined to cut rates sooner, especially given recent weaker UK economic data (wage and GDP numbers). Expectations for the next rate cut have shifted to September, with a significant chance of an August cut.
• The British Pound (GBPUSD) is currently trading at a one-month low, reflecting this uncertainty and opening up potential for further downward movement.

Federal Reserve Recap (Yesterday):

• The US Federal Reserve (Fed) held interest rates steady, as widely expected.
• Chairman Powell raised inflation expectations, partly due to tariffs, suggesting a cautious approach to future rate cuts.
• Key takeaway: While the Fed's "dot plot" still indicated two potential rate cuts this year, there was a clear split among officials, with many foreseeing no cuts at all. This divided outlook contributed to the US Dollar's strength post-meeting.

In summary, escalating geopolitical risks in the Middle East are fostering a cautious environment, while both the Bank of England and the implications of yesterday's Federal Reserve meeting are critical factors for market direction today.

19th June 2025

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