Five fundamentals for the week: World anxiously awaits Iran's response

What is next for the Middle East? The conflict around Iran remains in the spotlight, but monetary policy also remains closely watched.

1) The world awaits Iran's response

Mission Accomplished – that was the message from US President Donald Trump after American B-2 bombers struck three nuclear sites in the Islamic Republic. Does he want a deal now? What does Tehran have up its sleeve?

Investors and governments are trying to figure out if Iran, which vowed to retaliate, will go as far as closing the Strait of Hormuz, where roughly 20% of global Oil output passes. Another option is hitting US bases in the Middle East, trying to widen the conflict and make the war more controversial in America.

Other options would be negotiating a new deal, but that would take some time – the Iranians tend to take their time before reacting.

While uncertainty is high, there is more clarity about market reactions. The US Dollar (USD) is reemerging as a safe-haven asset while Gold is losing its shine.

Oil has knee-jerk reactions to any adverse developments, but markets fade such moves at a growing clip. I expect the current reaction mechanism to hold through the week.

2) Trade deals may spring to the forefront

Will the European Union accept a 10% base tariff? That is one of the burning topics in negotiations between the bloc and the US. Securing a trans-Atlantic trade deal is critical for growth on both sides of the pond, and also for security.

Washington continues to hold talks with other countries, such as Japan, India, and Canada. Any deal coming ahead of America's self-imposed July 9 deadline would boost sentiment in global markets, and especially the country involved.

However, even if the White House denies it, a delay to deadlines is certainly feasible – just do not expect it before the last moment.

In the meantime, Trump may offer some bluster and threats. He was emboldened by a court ruling allowing him to continue with his reciprocal tariffs until a hearing on July 31. That is a risk for markets. A few weeks ago, he threatened a 50% levy on all European goods, before speaking with EU Commission President Ursula von der Leyen and agreeing to keep duties down while talks continue.

3) Powell faces tough questions about the impact of tariffs

Tuesday and Wednesday at 14:00 GMT. Jerome Powell, Chair of the Federal Reserve (Fed), will face lawmakers in back-to-back sessions. While his prepared remarks are unlikely to deviate from messages he conveyed at the recent rate decision, their questions may provoke market-moving answers.

The impact of tariffs on inflation will likely be the hottest topic. If Powell reiterates the basic fact that somebody has to pay the tariffs – importers, retailers and eventually the consumer – markets would not like it. Staunch supporters of President Trump may ask him for evidence – as overall inflation has yet to rise significantly – and it will be interesting to see his response.

Another issue will be the war in the Middle East and its impact on prices. While a bump up in gasoline is obvious, anything Powell says about second-round effects will be of high interest as well.

I expect Powell to dodge any questions about his future or the choice of his successor. He could only say that Congress gave the Fed a mandate, and it is up to legislators to change the bank's role.

These testimonies last for long hours, and headlines could come at unexpected moments.

4) Final US GDP and other figures may cause choppy trading

Thursday, 12:30 GMT. Did the US economy indeed squeeze in the first quarter of the year? The third and final read of US Gross Domestic Product (GDP) is set to confirm a minor contraction, mostly a result of tariff front-running. As long as the Personal Consumption component within GDP remains upbeat, investors will stay content.

Apart from GDP, the US also releases other figures. Weekly jobless claims have stabilized at higher ground, and Durable Goods Orders for May could show a decrease in investment.

If all the data points move in one specific direction – either beating or missing – the impact would be more significant. A mixed bag of numbers would trigger choppy trading without changing the trend.

5) Core PCE gets closer to the promised land

Friday, 12:30 GMT. The Personal Consumption Expenditures (PCE) adapts faster to changing consumer preferences and, therefore, is considered more accurate than the Consumer Price Index (CPI) data released earlier in the month.

Most importantly, the Fed thinks so as well. More specifically, the Fed eyes core PCE, which excludes volatile energy and food prices, and that figure has been trending down toward the central bank's target of 2% YoY.

After rising by 2.5% in April, a minor increase is on the cards now. On a monthly basis, core PCE rose by 0.1% last time, and a similar increase is likely now.

It is essential to stress that tariff-induced inflation has yet to appear in the numbers due to inventory wind-downs and other reasons. Prices may march higher in the next few months.

Final thoughts

Calendar-based events have a release date, Trump's statements come during US datetime, but developments in the Middle East can grab headlines at any time. That makes things trickier these days. Trade with care.