Middle East conflict continues to dominate headlines

Good morning

There wasn’t a great deal to get my teeth into on my first day back yesterday.  News in the UK continued to be dominated by Burnham and his band of merry men and ladies in his new cabinet, while overseas it is still mostly about the US / Iran war and how it is escalating, with Yemen Houthi rebels now attacking two Saudi vessels in the Red Sea, which saw oil prices rise once again.  Iran commented that if they cannot sell oil, no one in the region will sell oil.  US equities ended lower after a reasonable close for European markets although futures pricing is pointing towards losses on the European open this morning.

We have seen little in the way of movement in the major currencies, GBPUSD and EURUSD are currently 1.3370 and 1.1420 with GBPEUR 1.1705.  We are slowly being fed policy changes by Burnham aimed at reducing the cost of living.  So far we’ve had a cut in VAT on domestic energy bills, a return to the £2 bus fare cap and now we have a cut in business rates for pubs and clubs.  The overall cost of the cuts so far is not massive but it is not yet clear how these will be funded.  Watch this space.

USDJPY remains above 163 at 163.15, with GBPJPY 218.15.  There is some interest around a change in personnel at Japan’s Ministry of Finance, where Mr Yahara replaces Mr Tokuoka as head of the operational side of intervention.  This does not mean a change of policy on intervention but a couple of major banks see any immediate action as more unlikely.  Next week brings both FOMC and BoJ rate announcements which could impact USDJPY levels although I expect even if BoJ raise rates again it would have minimal impact on Yen unless it was combined with coordinated intervention and a huge repatriation package.  For now, verbal intervention from Japan FinMin Katayama had little effect on Yen.

Aussie employment overnight was on the stronger side of expectations, beating not only this month’s estimates but also seeing revisions higher for last month’s numbers.  Headline employment saw its largest monthly gain since April 2025 at +76,000.  AUD pushed higher as a result, GBPAUD traded from 1.9125 to 1.9065, AUDNZD climbed 40 pips or so to 1.2065 and AUDUSD ticked up towards recent highs before settling back to 0.7000.

There is a lot of excitement but also concern over the good and bad that AI promises to bring.  The AI sceptics may well have seen the news from OpenAI that it had lost control of one of it’s advanced systems during what should have been a test in a controlled environment.  The AI system escaped the restrictions that had been placed on it and then hacked into the network of another company.  I guess stories like this may well make a regular appearance in the months and years to come but for now I admit to feeling a mild sense of alarm at the idea of a piece of software going rogue and doing its own thing.

After a quiet day yesterday we have a busier calendar today with rate announcements from ECB and CBRT, both expected to remain unchanged.  For the ECB it will be interesting to see what Lagarde has to say and whether she has a more hawkish tone to her speech particularly given the renewed military activity in the Middle East and the ongoing threat of second round inflation effects.  More Aussie data comes overnight, this time in the form of PMIs, Japan inflation is also out overnight. 

In the early hours of tomorrow morning we’ll have the latest retail sales numbers from here in the UK.  Expectations are for some disappointing numbers but I wonder if the decent weather and world cup has helped a bit of spending in recent weeks so perhaps we’ll have a welcome surprise to the upside.

Have a great day…

-  12.00 CBRT rate announcement

-  13.15 ECB rate announcement

-  13.30 US initial jobless claims

-  13.30 CAD retail sales

-  13.45 ECB press conference

-  15.00 EU consumer confidence

-  00.00 AUS S&P manufacturing, services PMI

-  00.01 UK GfK consumer confidence

-  00.30 Japan CPI

-  07.00 UK retail sales