Forex News

Iran's State TV reported that it has a draft of the initial unofficial framework of the Memorandum of Understanding with the United States (US).

According to the document, the US military forces will withdraw from the vicinity of Iran and lift the naval blockade. In Return, Iran has committed to restoring the number of commercial transit ships through Hormuz Strait to pre-war levels within in one month.

Key takeaways

"Military vessels are not included in this draft agreement."

"The management and route of ship traffic through Strait of Hormuz will be handled by Iran in cooperation with Oman."

"If a final deal is reached within 60 days, this agreement will be approved in the form of a binding UN security council resolution."

"The Islamabad Memorandum framework is not yet finalized; no step will be taken by Iran without tangible verification."

Market reaction

The US Dollar (USD) Index edged lower with the immediate reaction and was last seen losing 0.12% on the day at near 99.00.

• US private employers added an average of 35.75K jobs per week in early May.
• Job gains lose some momentum, receding a tad from the previous week’s gain.

Private-sector hiring in the US has cooled in early May. According to the NER Pulse, the weekly companion to the ADP National Employment Report, companies added an average of 35.75K jobs per week in the four weeks ending May 9.

That marks a marginal downtick from the prior reading, showing a potential impasse in hiring.

Societe Generale’s commodity team notes Brent has lost its 50-day moving average and is testing support around $96. They map several Strait of Hormuz reopening scenarios, with early resolution pointing to Brent near $85 by year-end, later outcomes implying spikes toward $150–$160, and a low-probability prolonged disruption scenario where Brent could exceed $200 per barrel.

Hormuz scenarios drive wide price paths

"Brent carved out a lower high around $113 last week and has given up the 50-DMA for the first time since January."

"The low reached earlier in May, around $96, serves as interim support."

"If Brent fails to defend it, a deeper downtrend may take shape toward the ascending trend line drawn since March at $91/$90 and $86."

"In summary: an early June reopening would nudge Brent down steadily to around $85/bbl by year-end."

"The lower probability event of Hormuz staying shut until year-end means Brent could top $200/b."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

BNY’s Bob Savage highlights that global equities extend gains on AI optimism and Iran peace talks. South Korean chip names power the KOSPI to records, while Chinese stocks lag despite strong profit data. iFlow shows broad equity outflows, with selective inflows into New Zealand, Singapore, Thailand and China.

AI chip boom versus selective outflows

"Global equities have extended their rally on AI optimism and ongoing peace talks with Iran in Pakistan. The Eid al-Adha holiday meant markets in much of South Asia were closed, while liquidity across markets remains focused on month-end and rebalancing."

"Chinese equities fell, countering the wider APAC rally, even as January-April industrial profits rose 18.2% y/y. "

" SK Hynix has joined the $1tn market capitalization club, which includes Samsung and Micron, on the back of AI memory chip demand. The South Korean KOSPI printed a new record high, with Samsung and SK Hynix accounting for half of the index."

"Broad-based outflows dominated across the iFlow universe, led by Japan, Indonesia and South Korea. Selected inflows were seen in Norway, New Zealand, Singapore, Thailand and China. Within DM sectors, utilities, materials and energy underperformed, while financials and consumer staples attracted buying."

"Samsung is up 149% YTD while SK Hynix has gained 215%. Their U.S. counterpart Micron is up 245% YTD. Expectations are that semiconductor chip prices will rise 63% in Q2. The investment boom continues, with returns from data centers justifying the money flow."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Brown Brothers Harriman’s (BBH) Elias Haddad notes AUD/USD slid toward 0.7136 and is expected to settle closer to 0.7000, consistent with Australia–US 2‑year yield spreads. Mixed April Consumer Price Index (CPI), with softer headline but firm trimmed mean, saw Reserve Bank of Australia (RBA) hike pricing pared back and leaves risks skewed toward a longer pause in the tightening cycle.

Yield spreads point to lower Aussie

"AUD/USD dropped to intra-day lows near 0.7136. We expect AUD/USD to stabilize lower around 0.7000, the level implied by Australia-US 2-year bond yield spreads."

"Australia April inflation was mixed. Headline CPI dipped more than expected to 4.2% y/y (consensus 4.4%, March: 4.6%) while the trimmed mean CPI matched consensus at 3.4% vs. 3.3% in March."

"The monthly CPI is Australia’s primary measure of inflation, but the RBA continues to focus on measures of underlying inflation from the quarterly CPI. Australia Q2 CPI data is due end-July."

"RBA cash rate futures trimmed bets of a 25bps hike by year end. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle."

"First, the RBA projects real GDP growth to be below potential over the next two years. Second, the RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• Silver price plummets 3.5% to near $74.10 as Fed officials warn of rising US inflation.
• The Fed is unlikely to cut interest rates this year.
• The US headline inflation has accelerated to 3.8% YoY in April.

Silver price (XAG/USD) is down almost 3.5% to near $74.10 during the European trading session on Wednesday. The white metal faces intense selling pressure as the focus of Federal Reserve (Fed) officials appears to be shifting towards elevated energy prices-driven high United States (US) inflation rather than weak labor market conditions.

Earlier in the day, Minneapolis Federal Reserve (Fed) Bank President Neel Kashkari said that the major concern for the central bank now is higher US inflation than deteriorating labor market conditions; however, the central bank needs to pay attention to both.

Fed’s Kashkari added, “Most of the US data released since my dissent in April has shown inflationary risks are higher, not lower.” On the monetary policy outlook, Kashkari said, “The Fed should have a neutral policy outlook going forward.”

Higher oil prices due to the Middle East war have prompted US inflation. As measured by the Consumer Price Index (CPI), the US headline inflation for April came in at 3.8%, the highest level seen in almost three years.

According to the CME FedWatch tool, the odds of the Fed holding interest rates steady at their current levels this year are 52.3%, while the rest favor at least one interest rate hike this year. This is a sharp turnaround from two interest rate cuts anticipated before the onset of the war.

Theoretically, the scenario of hawkish Fed bets or persistent hold on interest rates bodes poorly for non-yielding assets, such as Silver.

The Australian Dollar (AUD) strength against the New Zealand Dollar (NZD) may be about to reverse. 

Recent data from Australia reveals a softer-than-expected inflation alongside underwhelming employment figures, prompting market participants to scale back expectations for further interest rate hikes by the Reserve Bank of Australia (RBA). Conversely, a hawkish holding stance from the Reserve Bank of New Zealand (RBNZ) is providing strength to the Kiwi, leading major financial institutions to project a softer outlook for the Australian Dollar when compared to its main antipodean peer. 

The cross is already losing more than 1.2% on Wednesday, a daily decline not seen since the end of 2019.

Narrowing rate differentials threaten to drag AUD/NZD lower

Analysts at Societe Generale point out that while the RBA’s monetary tightening cycle appears to be losing steam due to cooling domestic indicators, the RBNZ has surprised the markets by leaning more hawkish. This contrast is expected to squeeze the interest rate differential between Australia and New Zealand, stripping away a major pillar of support for the Australian Dollar against the Kiwi.

AUD/NZD retreated from the 13-year high and the prospect of narrowing RBA/RBNZ rate differentials is a signal that the cross is destined to cheapen. A break below 1.2130 (50dma) opens 1.20.

Cooling inflation gives RBA breathing room to pause

Taking a closer look at the Australian economy, Commerzbank notes that lower-than-expected inflation metrics justifies a pause in Australia's interest rate hikes. Although underlying trimmed-mean inflation remains a warning sign, the broader cooling trend grants policymakers the flexibility to keep rates steady.

Unlike the Reserve Bank of New Zealand, the Reserve Bank of Australia (RBA) has already raised its key interest rate three times in recent months. However, this morning’s inflation data confirms our assessment that a pause is now likely to follow.

Banks point toward a cooling or peaking outlook for the Australian Dollar

Based on the insights from both institutions, the banks anticipate a downward or capping trend for the Australian Dollar's against the Kiwi. Societe Generale explicitly projects a bearish path for the currency against its regional peer, predicting that the AUD will cheapen as its yield advantage over the NZD shrinks. Supporting this softer outlook, Commerzbank expects the RBA to halt its rate-hiking cycle entirely for the time being, a move that removes immediate upward momentum to the Australian Dollar.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

ING’s Chris Turner notes EUR/USD remains sluggish despite progress toward a US–Iran agreement that could reopen the Strait of Hormuz and despite hawkish ECB commentary from Philip Lane and Isabel Schnabel. He argues that a stronger Fed tightening narrative should dominate in coming weeks, limiting EUR/USD upside and preventing sustained gains above the 1.1650/60 region.

Euro seen struggling to extend gains

"EUR/USD remains sluggish despite the world seemingly being days away from the US and Iran signing a Memorandum of Understanding to extend the ceasefire and reopen the Strait of Hormuz."

"Notably, the euro failed to get much of a lift yesterday from ECB speakers Philip Lane and Isabel Schnabel, firming up views for a 25bp rate hike on 11 June."

"We think the hawkish Fed story will be the more dominant theme over the next few weeks and struggle to see EUR/USD sustaining gains over the 1.1650/60 area in the current environment."

"The eurozone data calendar is exceptionally light today."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)