Middle East risks return to the fore

The week just gone saw Middle East risks return to the fore, with escalating hostilities between the US and Iran pushing Brent back toward the $80-mark. Still, oil remains some way off its peak earlier in the year, which should, in turn, keep central banks wary, but without prompting any immediate knee-jerk reaction for FX traders to consider. Rather, we suspect that this heralds a return to the dynamic seen before the US-Iran peace framework emerged, with two-sided risks helping to keep FX pairs trapped in recent ranges. If so, then US-Iran negotiation headlines are likely to be the dominant catalyst for currency markets in the week ahead, albeit with significant FX moves unlikely, absent greater clarity.

These latest developments do, however, mean that the main events of the upcoming week are likely to be somewhat overshadowed. The calendar is topped by the June US CPI release on Tuesday and a BoC rate decision on Wednesday. The former is now likely to be seen as somewhat dated, given recent events. The latter, we suspect, will see Governor Macklem once again pointing to the balance of risks posed by higher oil prices on the one hand, and USMCA renegotiation on the other, as a justification for leaving policy unchanged. All told, this gives markets little new to chew on, and as such, we are inclined to expect rangebound trading, assuming no new Middle East developments.You can read the Week Ahead in full here:

Authors:

Nick Rees, Head of Macro Research

Barry van der Laan, Senior FX Market Strategist

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