Here’s the update for Wednesday, July 22nd.
Midweek market conditions are uneasy as tensions escalate in the Middle East, with ongoing attacks between the US and Iran. Today’s economic schedule doesn’t include any major data releases, which means investors are likely to remain focused on geopolitical news.
The United States Dollar (USD) Index achieved its fourth consecutive day of gains on Tuesday, reaching a one-week peak above 101.20. Early Wednesday, the USD index is steady above 101.00.
Growing tensions impact carry trade as oil shock risks increase
Analysts at OCBC suggest that the prevailing situation in the Middle East could be managed without significant market volatility, thus supporting currency carry trades and preventing further USD appreciation ahead of next week’s FOMC meeting. However, they cautioned that the risks of a broader conflict have risen, particularly after the deaths of three US soldiers in an attack linked to Iran, suggesting that the risk balance for energy markets and the dollar is evolving.
OCBC also noted that a rise in oil prices could escalate concerns about a long-term supply disruption, potentially pushing prices above $100 per barrel. They pointed out that Brent crude oil reached $126 per barrel in late April, about 40% higher than current prices, emphasizing the potential impact of a price surge.
In such situations, the bank believes that increased market volatility could undermine the appeal of currency carry trades and contribute to a rebound in the USD as investors reassess geopolitical risks and how rising oil prices might influence policy decisions.
Domestic/International oil markets grappling with risk and instability
Crude oil prices increased early Tuesday, with West Texas Intermediate hitting a one-month high around $86, marking an over 1.5% gain for the day. The US military announced late Tuesday that it had conducted additional strikes against “military targets” in Iran. At the same time, US Secretary of State Marco Rubio stated that Iran was “not serious about talks,” warning that allowing Iranian control over the Strait of Hormuz could establish a “dangerous precedent.”
Two tankers transporting Saudi oil turned back amidst threats from the Houthis in the Red Sea. Meanwhile, President Trump warned of potential targets from Iran in the Mount Pickaxe area, where underground nuclear facilities are believed to exist.
Middle Eastern risks affecting Brent oil prices
Rabobank analysts highlighted that supply routes in the Middle East remain highly vulnerable. They explained that Hormuz is “on a knife’s edge,” with most flows ceased, except for the Iranian route. This situation worsened after two Saudi oil tankers made a U-turn in the Red Sea in response to Houthi warnings, hinting at the first signs of a potential blockade of Saudi ports. Rabobank contends that under these developing conditions, the energy market lacks the stability required to prosper.
The Office for National Statistics reported Wednesday that annual inflation, measured by the consumer price index (CPI), dipped to 2.6% in June, down from 2.8% in July, also falling short of the 2.7% market expectations. Core CPI, which excludes the more volatile energy and food prices, remained steady at 2.6%, reflecting May’s data. After four consecutive days of decline, the GBP/USD steadied after the inflation report, trading in a narrow range below 1.3400.
The closing price for the Australian dollar/US dollar remained nearly unchanged on Tuesday, hovering around 0.7000. As trading opened in Asia on Thursday, market participants would likely focus on June jobs data from Australia.
The price of gold (XAU/USD) experienced a bullish surge, climbing over 1.5% on Tuesday. By early Wednesday, it reached nearly two-week highs above $4,100.
In European markets, euro/usd saw a correction in its previous upward trend, now modestly rising above 1.1400.
The USD/JPY pair peaked above 163.00 on Tuesday—its highest level in almost 40 years. By mid-morning European time on Wednesday, a minor correction had occurred, with trading around 162.90.
Domestic investment gaining momentum amid changing markets
Rabobank strategists noted that USD/JPY is holding above 163, indicating that “the risks from potential oil price hikes, uncertainty for the auto sector, and geopolitical instability are not conducive to calming the market.” They emphasized that amidst such currency fluctuations and geopolitical concerns, a shift towards strengthening domestic capital markets is necessary. The finance minister has voiced intentions to promote measures encouraging pension funds, including GPIF, which manages $1.8 trillion, to expand significantly in Japanese financial assets. The goal is also to nudge Japanese households to follow suit, revealing the authorities’ commitment to channeling domestic savings into local financial assets.
