KBC Sunset Market Commentary 18/06/2025 via Trader Talent

KBC Sunset

Wednesday, June 18, 2025

Daily Market Overview

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Markets

• Of late investors experienced (too) many sessions being forced counting down to one or multiple event risk. Today was one of those. For some of those event risks sometimes it’s possible to do some conditional scenario analyses. If X, then the market reaction might be Y. This in some way applies to this evening’s Fed decision. For other (geopolitical) event risk, this kind of conditional scenario analysis is impossible. That is what is currently the case with speculation whether the US will join Isreal in its conflict with Iran. Blocked by this squared event risk markets, today, are captured in directionless trading. German and US yields are easing less than 3 bps across the curve. Fed communication recently flagged a firm wait-and-see bias. As long as the labour markets doesn’t collapse, the Fed will take its time to assess the impact of the trade war/tariffs and the budget on the basis of hard facts rather than on anticipative speculation. We see every reason for the Fed to maintain this reactive wait-and-see approach at this evenings meeting (dots & press conference). If anything, the market reaction to last week’s tentatively softer data (CPI, PPI, claims) suggest that investors are inclined to give more weight to even (minor) signs of perceived Fed softness. If so, this also suggests that Powell will have to be surprisingly hawkish to force the dollar out of the well-established sell-on upticks pattern. The dollar today eases back slightly after yesterday’s oil-driven up-tick (DXY 98.6, EUR/USD 1.152). Oil maintains most of yesterday’s gain (Brent $76.7/b). Geopolitically inspired paralysis currently keeps equities in a directionless holding pattern (S&P +0.1%, EuroStoxx -0.5%).
• UK May CPI data provided last-minute input for tomorrow’s BoE decision. They won’t be a game-changer. Inflation slowed to 0.2% m/m and 3.4% y/y (from 1.2% m/m and 3.5% y/y in April). Core inflation (3.5% from 3.8%) and services inflation (4.7% from 5.4%) also cooled. The outcome was very close to market expectations, but should be put in perspective. Last month, the market and the BoE got a solid upside surprise. The Bank of England is on a gradual interest rate path where it is tapering restrictive monetary policy by 25bpn on a quarterly basis since August last year. Today’s figures are no reason to accelerate easing, especially since inflation could remain at current or even slightly higher levels until the third quarter for technical reasons. Higher energy prices also warrant caution rather than anticipation in the coming months. After a weak ride in recent days, the pound initially gained marginally after the inflation data. However, markets soon realized that the BoE is potentially being curtailed in (growth-supporting) policy options, especially given the limited fiscal space. It’s not a positive story. Not for the UK economy, nor for the pound. EUR/GBP soon returned close to recent highs (currently 0.855).

News & Views

• Sweden’s central bank lowered its policy rate by 25 bps to 2% today. The rate cut was expected by analysts but not fully discounted by the market (+/- 80%). The Riksbank noted the economic recovery is proceeding more slowly than expected amid US import tariffs weighing on growth, despite them probably turning out lower than initially thought. GDP is seen expanding at a 1.2% clip this year compared to 1.9% seen in March. Forecasts for 2026 and 2027 were left more or less unchanged at 2.4% and 2.3%. The unemployment remains high. Inflation, meanwhile, has fallen since the upturn at the beginning of the year. Weaker demand will contribute to inflation being lower than in the March forecast. CPIF would rise by 2.4%-1.7%-2% in the 2025-2027 horizon, compared to 2.5%-1.9%-2% set out in March. The Riksbank concludes: “Overall, the outlook for inflation and economic activity suggests some easing of monetary policy.” The rate forecast entails some probability of another cut this year. Money markets attach a 66% chance to November. Swedish swap yields slide >5 bps across the curve. EUR/SEK rises back above the 11 barrier.
• PBOC governor Pan Gongsheng at China’s flagship financial forum in Shanghai laid out how he sees the future global currency order. He warned for overreliance on a single currency, ie the dollar, saying that it gets easily instrumentalized and weaponized in the event of a geopolitical conflict, national security interests or wars. Pan expects a multi-polar international monetary system to emerge after decades of USD dominance in which a few sovereign currencies “coexist, compete with each other, and check and balance each other”. In this world, Pan obviously sees a growing role for the renminbi. The RMB is currently the second-largest trade finance currency and the third-largest payment currency.