The South Korean won strengthened to around 1,490 per dollar, extending gains toward its highest level since mid-May, as investors increasingly priced in a Bank of Korea interest rate hike later this week. Persistent inflation, resilient economic growth, and elevated household debt reinforced the case for the central bank’s first rate increase in more than three years, supporting the local currency. The won also drew support from anticipated foreign exchange inflows, with SK Hynix expected to convert part of the proceeds from its $26.5 billion US listing into won for domestic investment, increasing dollar supply in the local foreign exchange market. Meanwhile, investors remained cautious as they monitored heightened Middle East tensions after the US reinstated a blockade of Iranian ports and President Donald Trump announced a 20% charge on cargo passing through the Strait of Hormuz, fueling concerns over higher energy costs, lifting oil prices, and supporting demand for the US dollar.
Today Markets – The Week Ahead
The Week Ahead: Geopolitical risks push the oil price higher It’s a shaky start to the week for financial markets. The oil price has risen by nearly 4% and Brent crude is trading above $79 per barrel. This comes after more attacks between the US and Iran in the Gulf, and statements from the Iranian regime that it has closed the Strait of Hormuz. The US is disputing this claim, but commercial traffic has slowed through the Strait once more, which is adding to the negative sentiment seen in financial markets today.
Will the oil price move higher?
This week will be a test to see if the continued skirmishes between the US and Iran can be absorbed by financial markets without causing major damage. The oil price remains below $80 per barrel for now, and the prevailing view is that the current situation will not evolve into another full-scale war, even if President Trump believes that the ceasefire is over. Thus, for now, oil price gains remain contained, and the price of Brent crude has not risen above $80 per barrel.
South Korean Kospi stays volatile
Stocks were sharply lower in Asia overnight, and the Nikkei fell about 2%. The South Korean Kospi plunged 9%, proving that it is one of the most volatile indices out there. This comes after SK Hynix, which listed on the Nasdaq last Friday, fell 15% overnight, eroding the gains made at the end of last week and experiencing its worst day ever. The South Korean listed stock price is down 19% in the past month, however, the sell off should prove to be temporary. There is huge structural demand for chips and memory, and this could be reinforced this earrings season, with high expectations for capex spending from the major hyperscalers to remain elevated into next year. Thus, any sell-off could be seen as a buying opportunity.
Momentum trade gets reality check
US futures are pointing to a lower open later today, led by the Nasdaq, which is forecast to decline more than 1%. The Dow Jones is expected to see the mildest sell off, with futures only predicting a 0.3% decline at this time. This suggests that the rise in geopolitical tensions and the spike in the oil price are disrupting the momentum trade once again, which will hit the tech trade and the chip stock rally. The reaction in the Kospi, which is dominated by chip stocks, could be replicated in a less volatile fashion elsewhere.
Why are chip stocks selling off?
The question is, why do geopolitical risks hit chip stocks and tech stocks more than other sectors of the market, even though the chip sector is more insulated from the chaos of the war? There are a couple of reasons for this: 1, the chip trade is big in the retail community, especially in Asia, who also have access to leveraged ETFs, thus when the external environment changes, some of these retail traders may take fright. If they have leveraged positions, this can magnify the sell-off. 2, when geopolitical tensions rise, it can lead to risk aversion and increase demand for physical assets including cash. This leads to some cutting of the most profitable trades, which are South Korean equities and global chip stocks so far this year. The South Korean market is now considered a key barometer of sentiment towards the chip sector, so when it declines it can have ripple effects across the world. With geopolitical risks rising once more, the focus for investors will be earnings season. Analysts remain upbeat on the earnings outlook, which could be why US stocks managed to eke out gains last week, even though President Trump said on Wednesday that the ceasefire was over with Iran.
US still managing to outperform
US indices outperformed their European and Asian counterparts last week. The S&P 500 rose more than 1%, the Nasdaq eked out a 0.9% gain, and the Dow Jones rose 0.4%. This compares with a 1.4% decline in the FTSE 100 last week, and a 1.6% drop in the Eurostoxx 50 index. If US tech stocks sell off sharply today, we could see European indices try and claw back some recent losses, however, over the past month, Europe has been a laggard compared to Asian and US indices, and this may continue as we move through earnings season.
The economic outlook
Overall, the economic data front is proving supportive, US ISM surveys showed a resilient service sector, as tech spending continues to boost economic activity. Added to this, the latest initial jobless claims suggest that the labour market remains solid, even though last month’s payrolls report was weak. In Europe, there were encouraging signs from Germany that its manufacturing sector is getting back on its feet after a long period of decline. In China, CPI is running in the opposite direction from the West and came in lower than expected at 1% YoY.
Andy Burnham to feel the strain from rising oil prices
In the UK, Andy Burnham is expected to be made leader of the Labour Party at the end of this week, before becoming PM next week. He faces a huge set of challenges and is attempting to put together a ‘mega’ budget in the next three months to lay out his plans for tax and spending by October. This means two things, he will likely keep quiet about his economic plans over the summer months, which could backfire on him and lead to wild speculation, secondly, expect a summer of horse trading, as Labour MPs clamor to get a slice of Burnham’s pie. The problem for Burnham remains the UK’s debt costs. Bond yields rose again last week, the 10-year Gilt yield was 12 bps higher.
Although this was in line with gains in yields across Europe, it is a keen reminder that UK bonds are sensitive to oil prices, and any extra borrowing from Burnham will come at a high price. We will be watching bonds and the pound in the coming days, to see if Burnham’s coronation causes any fluctuations in UK asset prices. As trading gets started this morning, bond yields are ticking higher and the gold price is also lower as the dollar catches a bid. This is another reminder that traditional safe havens, like government bonds and gold, offer no protection when geopolitical risks threaten inflation. Thus, if we see continued escalation in the conflict, and the oil price rises back towards $90, we will likely see a deeper selloff in sovereign bonds and in the gold price.
Events to watch this week
Geopolitical risks combine with monetary policy risks this week, as Kevin Warsh, the new
Euro Drops Near One-Year Low on Middle East Tensions
The euro opened the week at $1.14, nearing its one-year low from June, as investors responded to escalating Middle East tensions. Oil prices surged after another round of US strikes on Iran, with both sides disputing the status of the Strait of Hormuz. The US Central Command reported striking dozens of targets to weaken Iran’s ability to threaten shipping in the waterway. Iran, however, announced on Sunday that the strait would remain closed “until further notice.” The uncertainty fueled inflation concerns, leading investors to bet on further European Central Bank interest rate hikes. The ECB had already raised rates in June for the first time since 2023. Now, markets expect two additional hikes over the next year, with the first likely in September, to counter inflation driven by rising fuel costs tied to the Iran conflict. ECB policymaker Yannis Stournaras warned on Friday that the central bank is “back to square one” in its battle against high inflation in the eurozone.
Pound Slips as Middle East Tensions Weigh on Markets
The pound fell back below $1.34, retreating from three-week highs, as investors reacted to rising Middle East tensions. Oil prices surged following another wave of US strikes on Iran, with both sides clashing over the status of the Strait of Hormuz. The US Central Command confirmed strikes on dozens of targets to curb Iran’s ability to threaten shipping in the region, while Iran declared the strait would remain closed “until further notice.” The resulting uncertainty amplified inflation concerns, prompting investors to increase bets on further Bank of England interest rate hikes. Markets now anticipate at least one rate increase later this year, with a possibility of a second. Politically, Andy Burnham is set to become the new Labour party leader when the leadership contest ends on Friday and is expected to be officially appointed as prime minister next Monday. Sterling’s resilience amid recent political turmoil suggests much of the negative news has already been factored in.
Rupee Falls to Over Four-Week Low
The Indian rupee weakened to 95.7 per dollar, retreating from recent gains to its lowest level in over four weeks, as renewed tensions in the Middle East sent crude oil prices sharply higher. Sentiment deteriorated amid renewed concerns over India’s trade balance after Iran expanded its attacks to Qatar and the UAE following fresh US strikes on Iran. US President Donald Trump declared that the ceasefire was over, fueling fears of further supply disruptions. Brent crude surged more than 4% to $79.28 per barrel, increasing pressure on the rupee. Investors also monitored the Reserve Bank of India’s response, with market participants expecting the central bank to continue supporting the currency through dollar sales as higher oil prices threaten to fuel inflation. Meanwhile, traders closely watched the impact of rising oil-driven inflation concerns on US Treasury yields as markets assessed the implications of the latest strikes and counter-strikes on global energy supplies.
Offshore Yuan Slips on Stronger Dollar
The offshore yuan weakened to around 6.78 per dollar on Monday, retreating from a near three-week high reached in the previous session as escalating tensions in the Middle East boosted demand for safe-haven assets. The US dollar strengthened as surging oil prices revived expectations that the Federal Reserve may need to keep monetary policy tighter for longer, following a weekend of intensified clashes between the US and Iran and continued uncertainty over shipping through the Strait of Hormuz. However, the yuan’s losses were partly tempered by the People’s Bank of China’s midpoint fixing of 6.7972 per dollar, its strongest since February 10, 2023, although it was set 122 pips weaker than Reuters’ estimate. Investors are now awaiting a raft of key Chinese economic data due later this week, including trade figures, Q2 GDP, industrial production, retail sales, and unemployment data.
Canadian Dollar edges lower as US launches new wave of strikes against Iran
- USD/CAD drifts higher to around 1.4165 in Monday’s Asian session.
- The US launched a new wave of strikes against Iran aimed at ‘degrading’ the military.
- The BoC is likely to hold the rate steady on Wednesday.
The USD/CAD pair gains traction to near 1.4165, snapping the four-day losing streak during the Asian trading hours on Monday. The US Dollar (USD) strengthens against the Canadian Dollar (CAD) amid lingering tensions regarding the US-Iran conflict. The US June Consumer Price Index (CPI) inflation report will be the highlight later on Tuesday.
The US military carried out multiple attacks across Iran, saying they were aimed at “degrading” Tehran’s ability to disrupt commercial vessels in the Strait of Hormuz, per Bloomberg. The Islamic Revolutionary Guard Corps (IRGC) then launched retaliatory drone and missile assaults on US allies across the Middle East, including Kuwait, Jordan, Qatar, Bahrain, and Jordan.
Over the weekend, Iran stated that the Strait of Hormuz would now be closed “until further notice.” Signs of escalating tensions in the Middle East could boost a safe-haven currency such as the Greenback against the CAD in the near term.
On the other hand, a stronger-than-expected Canadian jobs report could provide some support to the Loonie. Data released by Statistics Canada on Friday showed that Canada’s economy added 18.2K jobs in June, continuing the momentum in the job market seen the month before. This figure followed a rise of 87.8K in May and was above the market consensus of 10K. The Unemployment Rate fell to 6.5% in June from 6.6% in May, better than the expectation of 6.6%.
The Bank of Canada (BoC) is anticipated to hold its overnight rate at 2.25% at its July policy meeting on Wednesday and keep it there well into next year as price pressures remain largely contained and the economy gradually recovers, a Reuters poll showed.
EUR/JPY Price Edges higher above 184.50, but stays capped by clustered resistance
- EUR/JPY gains momentum to near 184.65 in Monday’s Asian session.
- The cross keeps a bearish vibe in the near term, with the RSI holding below the midline.
- The first upside barrier emerges in the 184.80-184.85 zone; the initial support level is seen at 183.53.
The EUR/JPY cross trades in positive territory around 184.65 during the Asian trading hours on Monday. However, the potential upside for the cross might be limited as heightened geopolitical tensions in the Middle East could boost a safe-haven currency.
Furthermore, speculation over domestic asset shifts could underpin the Japanese Yen (JPY) against the Euro (EUR). Japan’s Finance Minister Satsuki Katayama said on Friday that the government is pursuing measures that would include the Government Pension Investment Fund (GPIF) to make “substantially greater investments in Japanese financial assets. Analysts said this move could offer greater support to the battered currency than intervention.
Technical Analysis:
In the daily chart, EUR/JPY keeps a mildly bearish near-term tone as spot holds beneath the 100-day Simple Moving Average (SMA) and the Bollinger Bands’ 20-day middle line. The pair is drifting in the lower half of the recent volatility envelope, with the lower Bollinger band acting as the next downside reference, while the Relative Strength Index (RSI) at 47.6 hovers just under the neutral 50 line, hinting at subdued, consolidative downside pressure rather than a strong trend.
On the topside, initial resistance emerges in the 184.80-184.85 zone, representing the Bollinger 20-day middle band and the 100-day SMA. A daily close above this clustered band would be needed to ease the current downside bias and expose the upper Bollinger band near 186.12. On the downside, the first notable support is the lower Bollinger band at 183.53, where buyers could attempt to slow the decline; a break below this level would reinforce the bearish bias and open the door to a deeper corrective slide.
