19/06/2025 Market Watch

U.S.-Iran Tensions Spike, Central Bank Caution

Key Takeaways:

  • US signals potential military involvement against Iran, escalating geopolitical tensions.
  • Global equities slump; USD and oil prices rise due to heightened Middle East uncertainty.
  • FOMC holds interest rates steady at 4.25-4.50%; cautious stance persists amid economic uncertainty.
  • Fed projections show potential rate cuts later in 2025; policy outlook remains divided.
  • Bank of England expected to maintain rates at 4.25%; dovish tone anticipated due to soft economic data.

Global markets experienced heightened volatility as the United States signalled a potential direct military confrontation with Iran. Reports indicate that the US is establishing the necessary infrastructure for a possible strike, possibly as soon as this weekend. Notably, President Donald Trump has reportedly approved attack plans but has withheld final authorization, marking a significant shift from previous diplomatic stances toward the Israel-Iran conflict. This geopolitical escalation prompted a broad sell-off in global equities, while the US dollar and oil prices surged, reflecting investor concerns over increased instability in the Middle East.

Meanwhile, the Federal Open Market Committee (FOMC) kept its benchmark interest rate unchanged at a range of 4.25-4.50%, aligning with market expectations. The Fed's updated economic projections highlighted increased uncertainty about inflation, employment, and economic growth, largely influenced by tariff-related disruptions. Although policymakers indicated possible rate cuts later this year, internal divisions remain clear, with opinions split between no cuts and up to two 25 basis point reductions. Fed Chair Jerome Powell emphasized a cautious, patient approach, stressing the current stance as suitably restrictive to manage prevailing economic risks.

In the United Kingdom, attention shifts to today's Bank of England meeting. Analysts widely anticipate the BoE to maintain interest rates at 4.25%, reflecting recent soft economic data. Market forecasts suggest a 6-3 split decision, with some policymakers advocating a modest rate cut. The BoE is expected to adopt a dovish tone, highlighting weaker-than-anticipated labour market data while affirming inflation and broader economic conditions remain generally consistent with previous forecasts.

United States of America

Overview

Significant US macro events, including the FOMC decision and the latest Treasury International Capital (TIC) data, had minimal direct influence on currency markets. The Fed's updated projections continued to indicate two potential rate cuts in 2025, although market participants largely discounted the dot plot given ongoing uncertainties around tariffs and oil volatility. Notably, the Fed appeared less worried about economic growth and unemployment, somewhat offsetting the mildly dovish projection.

The TIC data, released immediately after the Fed meeting, showed only a modest reduction in foreign holdings of US Treasuries, declining by just $36 billion out of approximately $9 trillion. This limited scale of foreign selling suggests that recent sell-offs were largely driven by domestic investors, countering earlier fears of widespread international divestment of US assets. Nonetheless, anecdotal evidence of a broader shift away from dollar-based investments persists, indicating markets will closely watch future data for clearer trends.

Despite these economic updates, geopolitical risks currently overshadow traditional economic indicators as the primary short-term driver for markets. Reports of the US potentially launching direct military action against Iran as soon as this weekend have raised global tension significantly. While recent dollar strength was initially questioned due to internal US policy issues, current geopolitical developments combined with elevated oil prices have reasserted the USD’s relative attractiveness compared to other energy-reliant currencies like the euro. Consequently, upside risks for the US dollar remain elevated in the short term.

Economic Drivers

  • Continued geopolitical tension involving potential US military action against Iran.
  • Limited foreign divestment of US Treasuries, reducing immediate concerns of significant international dollar sell-offs.
  • Ongoing uncertainty around tariff impacts and volatile oil markets.
  • Fed’s relatively calm outlook on growth and employment, despite cautious signals on potential rate cuts.

Data and Events

  1. 19 June 2025: Federal Funds Rate.
  2. 19 June 2025: FOMC Economic Projections.
  3. 19 June 2025: FOMC Statement.
  4. 19 June 2025: FOMC Press Conference.

Price Action

  • US dollar retains upward momentum due to safe-haven appeal amid geopolitical tensions.
  • High oil prices supporting USD strength against currencies more vulnerable to energy price spikes.

Key Points:

  • FOMC and TIC data had limited immediate FX impact.
  • Geopolitics dominates short-term market sentiment, notably US-Iran tensions.
  • Modest foreign selling of US Treasuries reduces short-term USD risk.
  • Dollar retains upside potential driven by geopolitical risk and high energy prices.

Europe

Overview

The EUR/USD pair is likely to experience further short-term corrections due to heightened geopolitical risks, particularly the escalating tensions involving the US and Iran. The immediate outlook suggests potential for the pair to explore lower levels, with near-term downside anticipated around 1.140. Such movements could occur even without further substantial rises in oil prices, given current market sensitivities.

However, geopolitical factors typically only exert temporary pressures on foreign exchange markets unless they significantly affect commodity prices in the longer term, similar to events witnessed during the Russia-Ukraine conflict. Consequently, buying interest in EUR/USD is expected to quickly re-emerge at initial signs of reduced geopolitical stress, providing support for the euro.

Meanwhile, the eurozone economic calendar is relatively quiet today, with the primary focus being on speeches from ECB President Christine Lagarde and other Governing Council members. However, wider Europe sees significant monetary policy actions, with central bank meetings scheduled in Switzerland, and the UK, each potentially influencing market sentiment across the region.

The Swiss National Bank (SNB) is particularly notable, expected to cut its benchmark interest rate by 25 basis points down to 0%. Markets anticipate further easing by year-end. Initial market reactions might support the Swiss franc slightly, but the prospect of a return to negative rates should ultimately cap these gains.

Economic Drivers

  • Geopolitical tensions, particularly related to US-Iran developments.
  • Temporary impacts from geopolitical events unless commodity prices are significantly affected.
  • ECB’s policy guidance and speeches influencing euro expectations.
  • Swiss monetary policy decisions influencing broader European sentiment.

Data and Events

  1. 19 June 2025: Eurogroup Meetings.
  2. 19 June 2025: SNB Monetary Policy Assessment.
  3. 19 June 2025: SNB Policy Rate.
  4. 19 June 2025: SNB Press Conference.

Price Action

  • EUR/USD faces short-term downside risks, potentially toward the 1.140 level.
  • Euro likely to find buying support upon easing geopolitical tensions.
  • CHF may see initial positive response from anticipated SNB rate cut, but gains limited due to potential negative rate scenario.

Key Points:

  • EUR/USD vulnerable to short-term geopolitical pressures.
  • Potential for deeper correction toward 1.140 before buyers re-enter.
  • Quiet eurozone calendar; focus shifts to ECB speeches.
  • SNB expected to cut rates, influencing wider European sentiment.

United Kingdom

Overview

The Bank of England (BoE) is widely anticipated to maintain interest rates unchanged at 4.25% at its upcoming meeting, aligning with prevailing market expectations. Despite this consensus, there is potential for multiple policymakers to dissent, advocating for a rate cut due to weaker recent economic data. Nonetheless, the central bank is expected to retain its general guidance, suggesting room for two potential rate cuts later this year.

Recent UK economic data have been notably softer, underscoring increased downside risks and contributing to a cautious policy environment. Consequently, market sentiment is leaning slightly dovish, reflecting concerns over growth and labour market conditions. This cautious outlook is anticipated to put upward pressure on the EUR/GBP exchange rate in the near term.

Economic Drivers

  • Recent weaker-than-expected economic data, suggesting slowdown pressures in the UK economy.
  • Increased likelihood of dovish dissent among BoE policymakers.
  • Anticipated guidance from BoE supporting market expectations of future rate cuts.
  • Continued geopolitical uncertainty affecting broader market sentiment.

Data and Events

  1. 19 June 2025: Monetary Policy Summary.
  2. 19 June 2025: MPC Official Bank Rate Votes.
  3. 19 June 2025: Official Bank Rate.

Price Action

  • Potential short-term upward pressure on EUR/GBP driven by dovish BoE sentiment.
  • GBP vulnerable due to expectations of future monetary easing.

Key Points:

  • BoE widely expected to hold rates steady at 4.25%.
  • Risk of dovish dissents, indicating potential future rate cuts.
  • Soft UK data reinforces dovish market sentiment.
  • Near-term bullish outlook for EUR/GBP remains intact.

SKONE Enterprise provides expert market analysis and forecasts. Our insights help traders and investors navigate the complex currency landscape.

© 2025 SKONE Enterprise (003319453-V). All rights reserved.

The content on this site is for informational purposes only and does not constitute financial advice.