More geopolitical risks emerge, as central bank decisions come thick and fast

Oil prices rising mildly this morning, even though reports have stated that President Trump has approved of plans to attack Iran, although he has withheld the final order for now. The oil price remains within its recent range. Brent crude is currently trading just below $77 per barrel, the top of the range since the Israel/ Iran attacks began last week.

The Brent crude oil price has moved up a step on the back of this conflict, and it is now trading within a tight range between $70-$77 per barrel. If the US strikes Iran in the coming days, then we could see a breakout to the upside. However, gains could be limited due to the record oil production from the US.

There are still hopes that a diplomatic solution can be found for this conflict, which is why the broader market reaction has been contained.

Why are investors favouring the dollar over gold?

In recent days we have seen a shift in the market’s favoured safe havens. The gold price has not rallied and is down by 0.48% in the past 5 sessions. In contrast, the dollar has been acting as a haven of choice in the past week. It is the best performing currency in the G10 FX space since the start of the Iran/ Israel attacks last Friday. Could this be the start of a dollar recovery? A break above 99.50, the 50-day sma, would be a short-term bullish development for this greenback and could see further gains. The dollar is gaining as the US reinforces its position as the world’s dominant diplomatic power.

Oil prices may be stabilizing this morning, and European equity futures are pointing to a higher open later today. US futures suggest that stocks will open lower later today, although so far this week we have seen European stocks, excluding the FTSE 100, underperform US stocks.

Europe’s defense sector cannot carry the entire index

Europe’s defense sector continues to extend gains as more geopolitical tension enhances its attractiveness, however, this sector alone cannot carry the European index. The FTSE 100 is naturally more defensive in nature than its European counterparts, and its outperformance has been led by oil companies, defense stocks and from factors outside of geopolitics, including a strong earnings report from Entain.

The Fed round up

Alongside the developments in the Middle East, the market will also be digesting another round of central bank decisions. The Federal Reserve kicked things off last night. The main points from its meeting included:

• Rates were left on hold for the fourth straight month.
• The Fed’s growth outlook was cut, and inflation projections were increased due to the impact from tariffs.
• Fed Chair Powell was sanguine about the inflationary impact from the conflict in the Middle East, because the US is less reliant on the region for its energy needs.
• The Fed’s updated Dot Plot showed that FOMC members still expect 2 rate cuts this year, although the longer-term outlook was for slightly less cuts than it predicted in March.
• The market could not make up its mind about whether the Fed was hawkish or dovish. Although the dollar extended gains, Treasury yields pared earlier gains as the press conference went on.
• Overall, this meeting does not shift the dial on Fed policy, they are still in wait and see mode, and the first cut is not expected until after the summer.

Bank of England preview

Yet more central banks will announce their latest policy decisions later today. The Bank of England is likely to stick to a similar path to the Fed and reiterate that they will cut interest rates in a careful and gradual manner. The BOE’s comments on inflation should be watched carefully. We are more reliant on oil imports than the US, we also have a strange energy pricing system, which is sensitive to spikes in wholesale prices. Due to this, we expect the BOE to be more cautious about the impact from oil prices compared to the Fed, which may boost the pound, but weigh on stocks later today.

In contrast to both the UK and the US, the Swiss National Bank is expected to cut rates to 0% later this morning and keep the door open to rates going in to negative territory later this year. However, we doubt that this will have an impact on the Swiss franc, which has risen more than 11% vs the USD so far this year, although it is only up 0.5% vs. the EUR, which is more important for the Swiss economy from a trade perspective.