Market Recap:
Escalating conflict between Israel and Iran, combined with weak UK economic data and upcoming US and UK interest rate decisions, has heightened market uncertainty, impacting currencies and driving investors toward safe havens.
Geopolitical tensions make investors nervous:
Conflict in the Middle East has added a new element of uncertainty to markets as Israel and Iran trade blows, while investors look to interest rate decisions in the US and UK
The news cycle has been dominated by reports of Israel’s strike on Iran’s nuclear facilities and Iranian retaliation. Fears of a wider regional conflict have already sent oil prices surging, and widespread uncertainty around how the conflict might play out could impact money markets over the coming days.
The euro hit a three-year high against the dollar earlier in the week but eased after news of Israel’s attacks. Nevertheless, it remains nearly 8% up on the greenback over the last year.
The pound slid against both the dollar and the euro in the wake of the attacks as investors looked to safe haven assets. The pound was further undermined by worse-than-expected UK GDP figures last week, with US tariffs beginning to have an impact on trade.
UK interest rate cuts expected:
With a number of indicators showing strain in the UK economy, expectations of a new round of interest rate cuts have risen. That is unlikely to happen this week, however, with most commentators predicting that rates will be held at 4.25% ahead of the Bank of England’s decision on Thursday.
In the US, the Fed is also likely to leave rates unchanged at 4.5%, with the announcement due on Wednesday. Higher interest rates attract investors looking for better returns, leading to exchange rate fluctuations.
Coming Up:
Interest rate decisions in the US and UK are not the only indicators that might move money markets this week. Retail sales figures in the US – expected on Tuesday – are projected to show the first fall since early in the year, with some commentators pointing the finger at President Trump’s import tariffs. In the UK, May’s year-on-year inflation rate data is expected to show a slight slowdown to 3.4%. More dramatic movements in either indicator could drive exchange rate fluctuations.
