Good morning,  

The situation in the Middle East remains tense, with the Iran-Israel conflict now in its sixth day. Concerns about potential US involvement in the conflict have sparked market anxiety this morning. The pressing question is, how far will the US escalate its participation? 

Unconditional surrender

Via his Truth Social platform, US President Donald Trump called for ‘UNCONDITIONAL SURRENDER’, implying that Iran should essentially capitulate. Just before this post, he noted that they (assuming he is referring to the US) have ‘total control of the skies over Iran’ and that they ‘know exactly where the so-called “Supreme Leader” is hiding. He is an easy target, but is safe there – We are not going to take him out (kill!), at least not for now’. 

Since Trump departed the G7 meeting yesterday, communication suggests that the US is on the verge of a more direct engagement with Iran. 

In terms of where we stand in the markets at the moment, the US dollar (USD), as measured by the US Dollar Index, finished yesterday on the front foot, up 0.7%, while US Treasury yields explored lower levels. In the equity space, US equities ended lower, with the Dow sliding 0.7% and dipping below its 200-day simple moving average (SMA) at 42,514. The S&P 500 closed down 0.8%, and the Nasdaq 100 fell 1.0%. Aside from the Dow, the S&P 500 and the Nasdaq 100 remain in positive territory for the year and north of their 200-day SMAs, therefore, this continues to be a dip-buyers market. As shown below, I am closely watching for any dips to the 2025 yearly opening level from 5,903 as a possible support target on the S&P 500.

Oil prices also saw their rally resume yesterday while Israel and Iran continued to exchange airstrikes. Spot Gold (XAU/USD) remains pretty much rangebound near all-time highs of US$3,500, while Spot Silver (XAG/USD) punched to fresh all-time highs of US$37.31, up nearly 30% year to date, helping to cement its position as a hedge amid global uncertainty.

Macro space: Fed rate decision ahead

Retail spending in the US declined by 0.9% in May, which is lower than the expected 0.6% decrease and April’s downwardly revised reading of a 0.1% fall (the initial print was a 0.1% gain). The decline in retail sales was largely driven by a 3.5% fall in auto sales. If autos were excluded from the calculation, the decline in retail sales would have been 0.3%; US consumers were clearly tariff front-running car purchases in March and stayed away in May. 

However, the retail control group reported an increase of 0.4%, following a 0.1% fall. This measure provides a more reliable indicator of consumer spending, as it excludes volatile components, such as autos and gasoline, and is also the value used to calculate GDP (Gross Domestic Product). Overall, this report is not inspiring, although given the rise in the control group, it does suggest that the headline dip could be temporary, and subsequent reports may prove more encouraging.

Earlier this morning, UK May CPI inflation data (Consumer Price Index) was in line with expectations across all headline measures, all but sealing the deal that the Bank of England (BoE) will remain on the sidelines tomorrow. The BoE is likely to leave the bank rate at 4.25% and continue its ‘gradual and cautious’ approach. You will note that last month’s meeting saw the central bank lower the bank rate by 25 basis points (bps), although there was considerable division among the Monetary Policy Committee. Markets continue to expect two 25-bp cuts this year, with the first likely to be delivered at either the August or September meeting.

In terms of the data, headline numbers showed inflation had risen by 3.4% year-on-year (YY), down from 3.5% in April, with the core YY measure also having eased by 3.5%, from 3.8%. Importantly, the services level decreased to 4.7% from 5.4% YY, which is in line with the BoE’s forecasts.

The big release today, however, is the US Federal Reserve (Fed) rate announcement at 6:00 pm GMT. As I mentioned in yesterday’s post, a unanimous vote to keep the target rate unchanged at 4.25% – 4.50% is highly likely despite Trump’s pressure on Fed Chairman Jerome Powell to shift from his current stance. Like the BoE, however, investors are pricing in the possibility of two additional 25-bp rate cuts this year for the Fed. Consequently, the focus today will likely be directed to any changes in language and the updated Summary of Economic Projections (SEP). I do not expect Powell to shift much from his current stance, maintaining a cautionary tone. I noted the following in a previous release:

For the most part, I also do not anticipate substantial changes to the Fed’s forecasts in their quarterly release, the SEP. Nevertheless, it should not raise too many eyebrows to a slight upward (downward) revision to inflation (GDP). 

While US economic data is demonstrating signs of softening, it is by no means ‘falling off a cliff’. Growth and inflation are currently in a reasonable position. Although GDP estimates indicate slowing economic activity, domestic demand remains stable, and the US remains at full employment, despite some layoffs. May CPI inflation also cooled, although it is forecast to rise in the coming months. Trade policy remains uncertain, as does the recent escalation between Israel and Iran, which may keep the Fed on hold until the latter part of the year. Markets are pricing in around two rate cuts this year (matching March’s SEP), targeting either the September or October meeting for the first 25-bp rate reduction. 

Charts created using Trading View 

Written by FP Markets Chief Market Analyst Aaron Hill