Iran escalation lifts oil, yields and the dollar

USD

The dollar extended gains overnight as US-Iran tensions reinforced safe-haven demand. Higher oil prices, stronger Treasury yields, and a Fed withholding forward guidance are keeping the dollar supported.

Rate markets still price further Fed tightening over the coming meetings. The FOMC minutes are the key event this week, although they may offer limited guidance under Chair Warsh’s communication blackout. Any hawkish tone would extend the dollar bid.

EUR

EURUSD remains under pressure as the stronger dollar and higher energy prices weigh on the euro. Brent above $76/bbl adds to euro area growth concerns while keeping inflation risks alive.

Front-end EURUSD volatility has rebounded as next week’s US CPI comes into scope. The options market has also turned more negative on the euro, with longer-dated risk reversals favouring euro puts. Unless risk sentiment improves, EURUSD remains vulnerable.

GBP

GBPUSD remains resilient compared with most G10 peers. The BOE Financial Stability Report confirmed that UK households and banks remain resilient, while the proposed easing of bank leverage ratios is supportive for gilts and repo markets.

Sterling is also supported by a BOE that remains alert to inflation risks. Catherine Mann has signalled readiness to hike if inflation expectations deteriorate in H2. That keeps rate differentials supportive versus the ECB and helps GBP absorb the geopolitical shock better than the euro.

CAD

CAD is supported by Canada’s stronger trade position and higher energy prices. The May trade surplus widened to the largest since May 2022, driven by record exports of energy, metals, and minerals.

Brent above $76/bbl improves Canada’s terms of trade, but the stronger dollar and renewed USMCA uncertainty limit CAD upside. The key driver over the next 24–48 hours is whether oil holds its geopolitical risk premium. Further escalation supports CAD through oil, while de-escalation would leave USDCAD more exposed to USD strength.

Disclaimer

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