The week was primarily dominated by hopes of de-escalation in the Middle East. Negotiations between Washington and Tehran appear to be progressing toward an interim agreement allowing for the gradual reopening of the Strait of Hormuz. This prospect has led to an easing of oil prices, a rebound in bonds, and new all-time highs for the S&P 500 and the Nasdaq. Markets now consider a deal likely, even though several points remain outstanding and Iranian authorities have not yet given their final approval.
On the macroeconomic front, data continues to confirm a two-speed US economy. On one hand, confidence surveys remain depressed, while on the other, consumption remains robust. Redbook sales are still growing - nearly 9% y-o-y - real consumption remains positive, private job creation is resisting, and the Atlanta Fed estimates Q2 growth at nearly 3.8%. The proposed explanation is as follows: the wealth accumulated by the Baby Boomer generation is currently playing a major stabilizing role. With nearly 90 trillion dollars in net worth, this generation continues to consume massively while providing financial support to children and grandchildren facing the affordability crisis. This private redistribution helps maintain domestic demand, despite historically low household morale.
The primary cause for concern, however, remains inflation. The PCE index, the Fed's preferred measure, has now reached 3.8% year-on-year, while Core PCE has risen back to 3.3%, its highest level since late 2023. Even more concerning, pressures are no longer limited to energy: services are also accelerating, and several regional surveys indicate a sharp rise in prices paid by businesses. For now, the market still views this inflationary spike as temporary and directly linked to the oil shock. However, the longer the conflict lasts, the greater the risk is that inflation becomes entrenched. Money markets are now pricing in over a 60% probability of a Fed rate hike by the end of the year, up from just 50% a week ago.
The underlying message therefore remains relatively simple: growth is resisting, earnings are increasing and employment is resilient. The real risk is not yet recession, but rather persistent inflation that would force the Fed to maintain a restrictive policy for longer than expected. As long as oil continues its retreat and the Strait of Hormuz approaches an effective reopening, risky assets should retain the benefit of the doubt and the dollar should recede.
Technically, EUR/USD is stabilizing above 1.1645/00, although is struggling to structure the expected rebound, while alongside this, the Dollar Index remains below 99.45. A break above 1.1680 would be needed to lend more credit to our scenario.
Elsewhere, USD/CHF is trading within a narrow consolidation band between 0.7905/36 and 0.7776, with a downside breakout still expected to target 0.7660. Commodity currencies remain generally well-oriented, as seen with the Aussie above 0.7100 and the Kiwi holding at 0.5815. Carry trade enthusiasts may look to go short on EUR/GBP upon a break of 0.8615.
