Peace agreement hopes and Fed day

The main narrative this morning remains the expectation that the US and Iran are set to ink a peace agreement on Friday, opening the door for 60 days of talks between the two sides. Markets, for now at least, have largely cheered the move despite lingering issues. These include Iran's enriched uranium, sanction relief and, of course, Tehran’s plans to place a tolling system in the Strait of Hormuz.

Oil benchmarks fell notably on Tuesday, with Brent crude down nearly 5% and now on the doorstep of the 200-day SMA at US$78, as traders expect the peace agreement to open the Strait. However, even if this waterway opens on Friday, this will take time!

In the US equities space, the picture was mixed, with the S&P 500 and Nasdaq taking a hit while the Dow Jones Industrial Average reached an all-time high of 52,915. However, Asia-Pac stocks are green across the board this morning.

My overall belief is that while I am optimistic this could finally be the light at the end of the tunnel, I am not convinced this will be a quick process and may actually become entrenched in remaining issues after the official signing on Friday.

Moving away from geopolitics, we have an incredibly busy data slate ahead!

UK inflation expected to rise

First up is the UK May CPI inflation report at 6 am GMT today. As I noted in yesterday’s briefing, with GDP growth meagre, a softening jobs market, and inflation closer to 3% than 2%, the year-end 30 bps of tightening priced in by the market seems a bit much, in my opinion. This opens the door to a potential unwind in hawkish pricing today if inflation comes in lower than expected.

Ultimately, economists forecast YY headline and core to reach 3% (up from 2.8% in April) and 2.7% (up from 2.5%), respectively. Looking at the forecast distribution, I would treat anything above 3.2% as an upside surprise and anything at or below 2.8% as a downside surprise for the YY headline. For the YY core measure, I am looking at 3% or above for an upside surprise and 2.5% or below for a downside surprise. Obviously, a miss would prompt investors to unwind some of the hawkish pricing and could pave the way for a lower GBP.

If data comes in higher, the GBP could rally, prompting investors to increase bets on BoE rate hikes. However, whether this will offer anything more than a scalp is difficult to estimate, as the growth picture and softening labour market make the BoE rate pricing challenging to sustain. Therefore, the initial upside move may be short-lived, offering an opportunity to fade the strength.

Fed day – All eyes on Kevin Warsh

It is all about the Fed meeting today, which lands at 6 pm. Markets have widely priced in that the central bank will leave the Fed funds target rate (FFR) on hold at 3.50-3.75%. This will also be the first time Kevin Warsh leads the charge at the press conference, a topic that has been widely discussed over the last week or so.

Personally, I find it very difficult to believe that he will come out all guns blazing on the dovish side, as Warsh is essentially caught between the Trump administration's desire for lower rates and data that is not yet sufficient to ease policy. And frankly, if you were Warsh, knowing you have 8 years as the Fed Chair and that Trump’s term ends in early 2029, you may play this very carefully.

I doubt Warsh will sound the dovish alarm bells just yet, despite political pressures. If he does, his credibility may be called into question, as markets may view it as him siding with Trump. Therefore, I believe he will be less dovish than he has been previously, but unlikely to sound hawkish. You will recall from the April meeting that the Fed held the FFR unchanged in an 8-4 vote, with three members voting to drop the easing bias – Governor Miran voted to cut rates by 25 bps, though he is not on the Fed now.

However, we do know that Warsh wants to reduce the balance sheet and alter the way the Fed communicates via forward guidance. If this does indeed happen, we can expect increased volatility around key data as traders attempt to formulate ideas about how the Fed will react.  

In addition to the rate announcement, the accompanying rate statement is expected to drop the easing bias language – this is priced in. Further to this, the Fed will also release its updated quarterly economic projections (or ‘SEP’), which are expected to show a hawkish tilt in the dot plot, with a near-term upward revision to inflation.

For me, the USD's response will largely depend on how Warsh shows up. We know that a hold decision, a drop in the easing bias, and potentially a hawkish tilt to the dots (removing the one cut this year) are pretty much expected, meaning the reaction to this may not offer much beyond a short-term pop higher in the USD.

However, if you couple this with Warsh opting for a more neutral position, suggesting a data-dependent approach, it will both demonstrate that he is not being influenced by Trump’s desires and signal a more hawkish stance than his previous comments, which could see the USD rally on the back of this. On the other hand, if Warsh sounds dovish, markets may discount any hawkish shift in the dot plot as not reflective of where the Chair actually wants to take policy, which would weigh on the USD.

New Zealand GDP data

Finally, at 10:45 pm GMT, we will get the Q1 26 GDP data from New Zealand. Economists' expectations suggest the QQ GDP to have grown by 0.8% from 0.2% in Q4 25 (estimate range between 1% and 0.4%), while the Q1 26 (YY) print is expected to ease to 1.1% from 1.3% (estimate range between 1.3% and 0.6%).

This is a bit of a tricky one to trade, I feel. While an in-line print will likely be overlooked by the market, should a lower-than-expected number come in – particularly if it hits the minimum estimates – this could dial back some of the hawkish rate pricing and weigh on the NZD. Money markets are pricing in around 56 bps of tightening by year-end, with 90 bps implied by August next year. However, a beat could offer the NZD some legs. With that said, I will approach this report with caution, as much of this release focusses only on a partial aspect of the oil shock. As such, limited volatility could be seen.