Renewed Fighting Ahead of Fed Minutes

MACRO FRAME

The latest military exchanges between the US and Iran re-inflate the geopolitical risk premium in energy and add a hawkish skew to the macro backdrop.

STOCK INDEX FUTURES

Equity index futures are lower amid the renewed strikes between the US and Iran, while Brent and WTI both rose over 4% in response. Trump said the interim US–Iran agreement to end the war is “over” and that he does not want to deal with Tehran further, framing Iranian leaders as beyond negotiation. Global bonds sold off alongside the oil spike, reflecting renewed concern that energy‑driven price pressures could complicate the “softening inflation” narrative. The drop builds on Tuesday’s losses, when investors rotated out of chip makers and other AI‑linked names, and now layers on a geopolitical shock. For today’s session, direction will largely hinge on Middle East headlines, but June FOMC minutes later today will be watched for how policymakers are thinking about inflation risks and growth; markets still price at least one Fed hike by the end of 2026, so a more hawkish tone would reinforce the rates headwind.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure.

CURRENCIES

US DOLLAR: The USD index was 0.13% higher to 101.15 overnight as the geopolitical backdrop fueled the bid for the dollar, while the rise in oil prices heightened inflation expectations and reinforced a more hawkish policy backdrop from the Fed. However, the lack of a sharper move higher indicates that markets are partly discounting his rhetoric and treating it as negotiation pressure rather than a definitive policy shift. The combination of higher oil and renewed Gulf tensions reinforces the sense that the inflation/rates narrative could become more complicated again, which supports the dollar on both the safe‑haven and rate‑expectation channels. Markets are focused on today’s release of the June Fed minutes and any signals on how serious the committee is about potential rate hikes. Markets are pricing roughly 36 bps of Fed tightening priced by December compared to 30 bps yesterday.

Watch point: Recent data has reinforced expectations that Fed policy will move higher before year-end. For now, markets will look to inflation signals for guidance on potential rate-hike timing.

EURO: The euro is little changed at $1.1404 as traders await further developments out of the Gulf and the Fed’s June minutes for policy signals from the Fed. A renewed conflict in the Gulf would increase inflation expectations and increase bets on European Central Bank rate hikes. Markets are pricing in 36 bps of tightening by year-end, up from 28 bps yesterday. Elsewhere, Germany’s cabinet approved a 2027 budget draft, which is raising borrowing up from earlier estimates, while France is allowing Marine Le Pen to run in the 2027 presidential race. The ECB publishes the account of its June meeting tomorrow, which should offer some details into policymakers’ views over second-round effects on inflation. Today’s geopolitical risk would support earlier dynamics seen in the EUR/USD trade in the outbreak of the Iran war, with the dollar gaining on safe-haven appeal and energy-related dynamics. However, markets will have to wait to see how the recent escalation unfolds. Given the current environment and previous policy response from the bank, a hawkish bias is likely to persist until policymakers gain a better understanding of the second-round effects of inflation, which may not come until later in the year.

Watch point: A peace deal, restoration of oil flows through the Strait, and easing services inflation are likely to push back tightening expectations, though policy expectations are still biased upwards.

BRITISH POUND: Sterling is little changed at $1.3351. Despite oil jumping about 4-5% after Trump declared the interim Iran agreement “over,” FX moves have been muted, with the dollar index little changed and sterling largely stable. The key market takeaway is that while the renewed U.S.–Iran flare‑up is clearly feeding through to oil and inflation expectations, it has not yet triggered a classic “flight to the dollar” or sharp GBP reaction. For the pound, it is reacting more to domestic factors than the latest Gulf headlines. Andy Burnham, the favorite to become the next Prime Minister has committed to the government’s fiscal rules, relieving fears among that he would ramp up spending once in power. The bigger factor is likely who becomes finance minister: betting markets currently give a slim majority probability to Ed Miliband, seen as more left‑leaning and fiscally expansive. UK money markets now price roughly a 74% chance of just one BoE hike this year.

JAPANESE YEN: The yen weakened 0.25% to 162.53 yen per dollar, remaining firmly in the intervention danger zone. Speculation about intervention around July 4 did not materialize, leaving traders wary of potential intervention. For the yen, bearish pressure in expected to continue in the near-term, especially if oil prices continue to climb, which could see a resumption of pre-ceasefire USD/JPY dynamics. A more hawkish Fed and large US–Japan rate differential still dominate currency moves as well, while any intervention is unlikely to change the underlying direction, only volatility. The market sees a total of 22 bps of tightening by year-end, with a move expected to come in January of 2027.

Watch point: With the yen sustaining a break above the 160 level, intervention from the government appears to be the greatest near-term risk against further depreciation.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.6923. The Reserve Bank of Australia’s chief economist in a speech overnight noted there were few signs of a market slowdown in the domestic economy, despite softer consumer and business confidence outlook surveys. Markets are largely expecting the RBA to be done with raising rates this year, leaving near-term price direction increasingly driven by market odds on a rate hike from the Fed. Currently, yield differentials are moving in favor of the dollar. The data calendar is once again thin this week for the Aussie. Minutes of the RBA’s June policy meeting showed the board still saw upside risks for inflation and stood ready to raise rates again if needed, having already hiked three times this year. However, members at the RBA were increasingly concerned about the risk of a downturn in the housing market, highlighting the board’s focus on the balance of risks. The recent drop in oil has led investors to pare back bets of another rate hike to 46%, and to flirt with the idea of cuts as early as mid-2027.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in the RBA’s policy minutes.

TREASURY FUTURES

Yields moved higher across the curve in reaction to the renewed fighting in the gulf and resulting rise in oil prices as traders await today’s Fed minutes. Warsh has already overhauled the post‑meeting statement, stripping out forward guidance and cutting back description of current conditions, so the minutes matter more as a window into the “family fight” he described over two days of internal debate. The labor market has stabilized after last year’s weakening trend, reducing the urgency for cuts and giving hawks more room to argue for renewed tightening. Because the statement no longer offers guidance, the minutes could reveal how many officials are in the “hike at least once” camp versus the “hold” camp, show what data (inflation, labor, financial conditions) moved those views, indirectly shape expectations for the timing and probability of hikes, especially if they highlight concern about war‑related inflation and lingering price pressures. Markets are priced for a move higher in December and see a total of 36 bps of tightening by year-end.

Watch point: The Warsh-led Fed held on rates and signaled broad institutional change. Mainly, markets should expect fewer words from the Fed and less policy signaling, raising near-term rate volatility with incoming data.

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