Sunset Market Commentary – ActionForex

Markets

The market setup today was broadly similar to yesterday. Despite multiple execution risks surrounding the US-Iran agreement, markets have adjusted positioning to reflect at least some improvement in supply disruptions and a moderation of inflation pressures. Brent crude holding below USD 80/bbl remains a key barometer of that view.

Economic data are still somewhat outdated, reflecting conditions before the agreement was announced, but they help establish the starting point. Final Eurozone CPI data for May delivered a small surprise. Headline inflation was confirmed at 0.1% m/m and 3.2% y/y, while core inflation was revised higher to 2.6% from 2.5%. The revision is not a game changer, but it comes as several ECB policymakers have stressed that, even after the US-Iran agreement, they remain focused on how higher oil and commodity prices are filtering through the broader economy.

ECB member Simkus indicated today that he still leans toward the possibility that an additional rate hike may be needed. Meanwhile, the ECB wage tracker points to wage growth of 2.6% in 2026 compared with 3.0% in 2025. Even so, Eurozone yields appear to have reached a short-term equilibrium, with moves ranging from +1.5 bps at the 2-year tenor to -1.5 bps at the 30-year tenor.

Similar price action is visible in US rates, where yields are moving by less than 2 bps across the curve. US interest-rate markets are now entering the final countdown ahead of the Fed decision and the first press conference from Fed Chair Kevin Warsh. The Fed is widely expected to leave the target range unchanged at 3.50%-3.75%.

After already attracting dissent in April, the policy statement is likely to remove any remaining reference to additional downward adjustments, effectively dropping the easing bias. Strong payroll growth continues to point to economic resilience. May retail sales, with headline sales up 0.9% m/m and the control group up 0.7% m/m, reinforce that message.

At the same time, both headline and core inflation continue to move away from the Fed’s 2% target. April PCE inflation stood at 3.8% y/y on the headline measure and 3.3% y/y on the core measure, while May CPI rose to 4.2% y/y headline and 2.9% y/y core. Markets will therefore closely monitor the updated Summary of Economic Projections and the dot plot. These projections may remove the expectation of an additional rate cut this year and in 2027 that was still present in the March forecasts.

It will also be important to gauge Chair Warsh’s position. Warsh has expressed skepticism about forward guidance and the dot plot framework. He may also seek changes to Fed communications, including fewer press conferences. Regardless of any future organizational reforms, today’s meeting is expected to help establish a floor under US yields. Relatively elevated yields, supported by resilient growth and persistent inflation, could remain supportive for the dollar in the near term.

The dollar has held up well despite the risk-on mood that followed the US-Iran agreement. The DXY Index at 99.65 keeps the 100.00-100.56 resistance zone within reach, while EUR/USD continues to struggle to regain a foothold above 1.1600.

UK inflation data for May delivered a mixed picture. Headline CPI rose 0.2% m/m and remained at 2.8% y/y, below expectations. Core inflation increased to 2.6% y/y from 2.5%, also slightly below consensus. However, services inflation accelerated unexpectedly to 3.7% y/y from 3.2%.

Despite the persistence of services-sector price pressures, today’s figures suggest there is no urgency for the Bank of England to abandon its current wait-and-see approach. Gilts outperformed, with yields falling 4-5 bps across the curve. Sterling weakened modestly, with EUR/GBP trading near 0.8650.

News & Views

The Swedish Riksbank left its policy rate unchanged at 1.75%, but acknowledged that the probability of a rate hike later this year has increased compared with its March assessment.

Swedish inflation remains low, partly due to fiscal measures that are dampening price pressures. Economic activity is weaker than normal, with growth undershooting expectations in the first quarter, while the labor-market recovery remains tentative. Given the considerable uncertainty surrounding the outlook, policymakers emphasized the need for vigilance.

The Riksbank lowered its CPIF inflation forecast for 2026 to 1.1% from 1.5%, while raising projections for 2027 to 1.7% from 1.3% and for 2028 to 2.8% from 2.7%. Growth forecasts were revised lower for 2026 and 2027 to 2.2%-2.3% from 2.5%-2.6%, while the 2028 forecast was raised slightly to 1.4% from 1.3%.

Markets reacted calmly to the modest hawkish adjustment. A Riksbank rate hike is only fully priced by early next year. EUR/SEK remains confined within the narrow 10.75-11.00 range that has prevailed since mid-March.

The International Energy Agency (IEA) lowered its global oil demand forecast for 2026 after second-quarter deliveries fell by 5 million barrels per day year-on-year amid higher fuel prices and disruptions to product availability.

Global demand is now expected to decline by 1.1 million barrels per day in 2026 to 103.3 million barrels per day. Global supply is projected to fall by 3.9 million barrels per day to 102.4 million barrels per day. In May, production fell to 94.5 million barrels per day, down 600,000 barrels per day from April and 13.6 million barrels per day below pre-conflict levels.

According to preliminary estimates, global oil inventories have fallen by an average of 3.8 million barrels per day since the start of the conflict, including a substantial draw of 143 million barrels during May alone.

OECD government inventories have fallen by 163 million barrels year-to-date, reaching their lowest level since December 1990 as emergency stock releases accelerated.

The IEA’s first assessment of 2027 points to a significant supply overhang. Global oil demand is projected to increase by a relatively modest 2 million barrels per day to 105.3 million barrels per day, while global supply could surge by around 8 million barrels per day to 110 million barrels per day.