Middle East conflict and pressure on chips challenge investors

The re-intensification of the Middle East war initially roiled the markets but as the session progressed, oil has pulled back and equities have stabilized. August WTI briefly traded above $75 and is now around $73.50, which is still nearly 3% higher. Most of the large Asia Pacific equity markets were under pressure but Europe is little changed and US index futures are mixed. 

The US dollar is mixed. The Japanese government reportedly will not formally overhaul the allocation of the government’s pension funds, despite what it may have appeared like before the weekend, and the yen and JGBs are softer today. Since last week’s hawkish hold by the Reserve Bank of New Zealand, the Kiwi has been the strongest in the G10 and remains so today. Undaunted by the heightened volatility and the risk of further disruption of commerce through the Strait of Hormuz, the PBOC set the dollar’s reference rate at a new three-year low. 

Prices 

G10

It is difficult to get excited about the euro if it remains in the range set July 2 with the US jobs data: ~$1.1375-$1.1475. Ahead of the weekend, it did trade on both sides of the previous day’s range, but settlement was neutral and below the 20-day moving average (~ $1.1430 today). The escalation of the Middle East war saw the euro sold to about $1.1385 today before it recovered in early European activity to new session highs around $1.1445. The intraday momentum indicators are stretched. Options for almost 785 mln euros at $1.1400 expire today and, tomorrow, 2.3 bln euro of options expire there. Given the euro’s sensitivity to US two-year rate changes and the fact that tomorrow could see the first decline in US CPI since the Middle East war began, the constructive momentum indicators, there may be scope for additional near-term euro gains. 

Japanese investors have been selling foreign assets this year, according to the weekly MOF data. Yet, the finance ministers call for Japanese pension funds to boost domestic allocation lifted the yen by around 0.5% ahead of the weekend, its biggest gain since early May and the first back-to-back gain since early April. The dollar finished last week below the 20-day moving average (~JPY161.75 today) for the first time since mid-May. Reports indicate that the Takaichi government has no plans to overhaul the asset allocation of the Government Pension Investment Fund (GPIF). The greenback is consolidating with the pre-weekend range so far today (~JPY161.65-JPY162.35). 

Sterling reached almost a four-week high before the weekend, slightly above $1.3450. It stopped in front of the June 15 high (~$1.3460), which also corresponds to the (61.8%) retracement of the decline from the May Day high (~$1.3660). The next technical hurdle is seen in the $1.3480-$1.3500 area. The latter is the halfway mark of this year’s range. Sterling rose for the 11 of the past 12 sessions. Sterling was sold to almost $1.3365 today but recovered to record the session high slightly above $1.3410 in early European turnover, where options for about GBP315 mln expire today. Initial support now is seen around $1.3380. 

Culminating a week of favorable data, including the June employment report before the weekend, the Canadian dollar snapped a five-week slide. It begins this week with a four-day advance in tow. It is the longest rally since April. The greenback settled below its 20-day moving average (~CAD1.4170 today) for the first time since May 7. The US dollar rose to CAD1.4175 today before coming back off. It was pushed slightly below CAD1.4135 in early European turnover. Nearby support is seen around CAD1.4115-20. A break of CAD1.4080 could spur a move toward CAD1.3980. 

The Australian dollar reached new highs for the week before the weekend near $0.6970. It was the sixth daily advance in the past seven sessions. The Aussie has not been this high since June 23. It settled above the 20-day moving average (~0.6945 today) for the first time since the end of May. The five-day moving average looks poised to cross above the 20-day moving average in the coming days. The Australian dollar was initially sold to about $0.6925 before it stabilized. It recovered to almost $0.6950 before stalling Options for almost A$400 mln at $0.6930 expire today. 

EM 

The dollar was sold to three-day lows against the Mexican peso before the weekend. It still settled slightly higher on the week, despite slipping lower for past two sessions, for the first time since mid-June. The greenback is consolidating within its pre-weekend range. The 20-day moving average is slightly below MXN17.46 and a close below would weaken the dollar’s technical tone. 

Against the offshore yuan, the dollar peaked in the middle of last week around CNH6.81 and finished the week slightly above CNH6.78, its lowest close since June 22. Last month it forged a base slightly above CNH6.75. The dollar has spent today’s session so far, below the 20-day moving average (~CNH6.79), but it has held above the pre-weekend low (~CNH6.7765). The PBOC set the dollar’s fix at a new three-year low and further below CNY6.80 (CNY6.7972 vs CNY6.7989 before the weekend). 

The jump in oil prices weighed on the Indian rupee. The greenback gapped higher and reached almost INR95.86, its highest level since May 22. The central bank apparently intervened around INR95.75, according to some reports. 

Other markets

Equities finished firmly at the end of last week and are mostly weaker today. While the MSCI Asia Pacific Index and Europe’s Stoxx 600 still fell on the week, the US S&P 500 and Nasdaq rose by more than 1%. Most of the large Asia Pacific bourses fell today, led by the nearly 9% drop in South Korea’s Kospi and a 4% drop in Shenzhen. Taiwan, Australia, and India eked out minor gains. Europe’s Stoxx 600 is slightly weaker near midday. US S&P and Nasdaq futures are trading lower (~0.30% and 1.0%, respectively). 

Benchmark 10-year yields in Europe and the US rose by 8-11 bp last week. The best performer in the G10 was the beleaguered Japanese government bond. Following the finance minister call on Japanese pension funds to boost their domestic allocation, the yield snapped a nine-day advance and fell by 13 bp for a net nine basis point decline on the week. Yields are higher today: ~4 bp in Japan, 2-4 bp in Europe, and the 10-year Treasury yield is a little more than a basis point firmer ~4.57%. The two-year US yield edged up to a new high for the year today, a little above 4.23%. 

Gold fell to around $4022 in the middle of last week. It recovered to almost $4140 but stalled there. The market seems to lack near-term conviction. It fell to a three-day low today near $4044. Silver traced out a similar pattern. The mid-week low was slightly below $57.25, and although it stabilized it was unable to settle above $60. It was sold to almost $57.70 today before stabilizing. 

The escalation of hostilities in the Middle East saw August WTI jump to a little above $76 in the middle of last week. It reached almost $67 on July 2, the low since the war began. The continuation of talks between the US and Iran were seen as more important than the kinetic engagement. Before the weekend, Aug WTI slipped to almost $70.75, finding support ahead of the 200-day moving average (~$70.50). The weekend developments saw the contract gap higher and briefly traded above $75 but has come off and filled the opening gap. Still, as the North American traders return to their posts its above $73. 

Data

The June US budget deficit will be reported late today. The markets tend not to react even though nearly everyone expresses concern about the deficit and accumulating debt. In the first five months of the calendar year, the US recorded a budget deficit of about $644 bln. In the Jan-May 2025 period, the US shortfall was around $653 bln. The bipartisan Congressional Budget Office expects this fiscal year’s deficit to reach $1.9 trillion, the same as in the last fiscal year. 

India reported a larger than expected June trade deficit and firmer CPI. The $30.4 bln trade deficit was the largest since January and compares with an $18.8 bln deficit in June 2025. India’s trade deficit in H1 26 is about a third largest than in H1 25. Exports have risen 15.5% year-over-year, while imports surged by 31%. India’s June CPI rise to 4.38% from 3.93% in May. It is the highest since the end of 2024. It is above the 4% target for the first time in almost 1 ½ years. Food prices jumped 5.05% year-over-year.