Weekly focus – Geopolitics is back in the spotlight

With an Israeli attack on Iran early on Friday, geopolitics is strongly back to the agenda. This time around, the attack was larger in scale and more severe than the strikes we saw last year. Hence, Iranian retaliation is also expected to be stronger and has already started. Simultaneously, Israel is saying that the operation will last several days. We think one of the key determinants for markets will be whether Iran shows some restraint in their retaliation and abstains from targeting US bases in the region, or whether it chooses otherwise, and we witness the US getting absorbed into a new conflict in Middle East.

For energy markets going forward, the key thing is whether energy supply or trade will be disrupted by the recent escalation. On Friday, oil prices recovered rapidly from an initial spike above USD 78 level, as the Israeli strikes did not target Iranian oil facilities. In case future attacks would damage Iran's oil production sites, prices could react more strongly. The most severe scenario, though, is one where Iran would close traffic via the Strait of Hormuz. Such an attack would severely disrupt oil exports from the Gulf region, but the impacts would be even more pronounced for the global LNG trade. We think the risk of such an extreme measure is low, but it should not be completely ignored.

Speculating about a renewed global energy crisis is way too early at this point. Should Iranian oil production be temporarily disrupted, OPEC oil producers could choose to compensate for that. Also, the US has strategic oil reserves that they could choose to sell if the market started tightening too much. That said, a severe disruption in oil or gas trade as a result of the closure of the Strait of Hormuz would probably trigger a very steep rise in prices, with a strong negative impact on consumer and business sentiment. For now, we are not too concerned as inflation pressures have kept on moderating, read more on Global Inflation Watch - Price pressures moderated in May despite trade war, 11 June.

During an otherwise uneventful week, equity markets were range-bound until geopolitical risks started weighing on the sentiment towards the weekend. The US dollar gained against the euro on Friday, but EUR/USD remains one and half a figure higher on the week. Gold price reached new highs on Friday amidst rising geopolitical uncertainty.

Next week, focus turns to central banks. We start with the Bank of Japan on Tuesday. We expect the BoJ will keep monetary policy unchanged. Trade war uncertainty has pushed the pause button on the hiking cycle. Riksbank will announce their rate decision on Wednesday and Norges Bank will follow suit on Thursday (read more below).

On Wednesday, all eyes are on the FOMC. We expect the Fed to maintain its policy rate unchanged, in line with consensus and market pricing. We still expect the Fed to cut rates twice in 2025 in line with March dots, followed by three more cuts in 2026. We do not expect strong forward guidance from Powell, but see risks skewed towards modestly dovish market reaction. Read more on Research US - Fed preview: Still on the sidelines, 13 June.

On data front, we will keep an eye the monthly batch of Chinese data on Monday and the German ZEW index on Tuesday. Obviously, we will also closely monitor the developments in Middle East.

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