Markets
Yesterday’s European flash PMIs were largely in line with expectations and offered limited market impact. The services sector showed modest improvement, raising the composite index to 49.5—still below the neutral 50 level. Most responses were collected before the US‑Iran agreement on 17 June, so the final PMI releases due early July are likely to be upwardly revised. Meanwhile, price gauges have retreated from recent multi‑year highs. ECB Chief Economist Lane testified before the European Parliament, warning that inflation could stay above the 2 % target into the first half of 2027 and projecting readings above 3 % for the remainder of the year. He justified the June rate hike, noting that even under the ECB’s milder scenario, inflation will remain elevated enough to warrant a measured tightening. His presentation indicates that combined energy prices now sit between the ECB’s milder and baseline scenarios. Money‑market expectations for another 2.5 % hike later this year remain unchanged after the PMI data. German bunds modestly outperformed US Treasuries, with yields falling 2.1–3.6 bp but staying above troughs; US yields slipped 0.3–2.8 bp, supported by weakened risk sentiment. Equities declined on both sides of the Atlantic, with tech stocks facing particular pressure as investors lock in strong year‑to‑date gains ahead of the first‑half close. Industrials and small caps showed relative resilience. Currency markets are finally breaking out of their recent range. After months of tight trading, technical breaks are emerging in many dollar pairs. The USD has become the market’s favored safe haven since Fed Governor Warsh’s June policy‑meeting remarks helped restore the Fed’s credibility and political independence. Risk premia that previously weighed on the greenback are now reversed, and a solid US economy and labor market have pushed EUR/USD below the critical 1.1392 support to around 1.1370, with next support near 1.12–1.11. The DXY surged past 101.138, reaching its highest level since May 2025. USD/JPY stalled near multi‑decade highs just below 162, as investors watch for possible Japanese intervention. Sterling is edging toward the EUR/GBP 0.86 support, forming a bullish closing triangle, while political uncertainty eases with Burnham emerging as the next prime minister. A breach below 0.86 would target 0.8468 (a 61.8 % retracement of the 2024‑2025 rally). With an empty economic calendar today, technical factors and the risk backdrop are expected to dominate trading, potentially prompting further repositioning ahead of the quarterly close.
News & Views
Australian headline inflation fell more than expected in May, dropping 0.7 % month‑on‑month, while the year‑on‑year rate eased unexpectedly from 4.2 % to 4.0 %. The main drivers were a 11.9 % fall in automotive fuel prices, following a 7 % drop in April, reflecting the halving of the fuel excise and lower global oil prices. Excluding such volatile items, the Reserve Bank of Australia’s trimmed‑mean CPI rose 0.4 % month‑on‑month and 0.2 % quarter‑on‑quarter, reaching 3.6 % year‑on‑year—the highest since the series began in April 2023. Housing was the largest annual contributor, up 6.5 %, followed by food and non‑alcoholic beverages (+3.3 %) and transport (+3.3 %). The core increase did not lift the Aussie dollar; AUD/USD broke the 0.70 barrier amid broad dollar strength, with technical support now at 0.6833 (March low).
Minutes from the Bank of Japan’s June meeting reaffirmed the central bank’s tightening bias, stating that CPI inflation is approaching 2 % and financial conditions remain accommodative, warranting further rate hikes. Markets now price a move from 1.0 % to 1.25 % by the December meeting. Japanese services price inflation held steady at a revised 3.3 % year‑on‑year in May. The yen continues to hover just below the 2024 peak of USD/JPY 161.95, as USD strength is offset by verbal intervention warnings from Japanese officials. The risk of a breakout to levels not seen since 1986 is rising.
