The biggest story now remains the conflict in Iran, and by extension, the closing of the Straight of Hormuz. Retail Sales in the United States surprised to the upside on Tuesday, showing that the economy isn’t cooling off as quick as some would like to form an inflation standpoint. Late in the trading day on Tuesday, President Trump agreed to extend the ceasefire. As for the Wednesday calendar, there is only the United Kingdom CPI numbers expected.
Trump decided late on Tuesday to extend the ceasefire, as requested by the Pakistani government, and cited that the Iranian regime was “too fractured” to put together a unified proposal.
So far, it appears that Asian traders are looking to push risk appetite higher, with the overnight futures market in the NASDAQ 100 rallying. The market continues to look overstretched, as the momentum remains strong overall. Currently, barring any news out of the Middle East, it looks as if traders are willing to buy dips.
Crude Oil continues to be front and center, as consolidation continues in the front month, right around the $90 level. Traders are in a “wait and see” mode now.
Gold continues to move inversely to the US 10-year yield, which is back near the 4.30% level, an area that has been somewhat important for risk sentiment. As yields rise, gold falls and vice versa. It is not a safety play at the moment.
Retail Sales in the US continue to be strong, despite concerns about inflation. This remains a core driver of earnings growth for companies in the US and could continue to drive the narrative that the Fed will remain tighter.
With the Core Retail Sales figure being 1.9% month-over-month, versus the expected 1.4%, this shows the resilience of the US consumer. Of note is earnings in the consumer staples and retail sectors continue to look strong by all accounts as we head into the bulk of the earnings season.
The UK CPI numbers may or may not move the needle for the British economic outlook on Wednesday, as traders are undoubtedly focused on potential energy inflation more than anything else. The expected reading of 3.3% year-over-year will more likely than not be a non-factor, unless combined with news from the Middle East.
A reading of higher-than-expected numbers would potentially be strong for the British Pound, as traders will continue to push the idea that the Bank of England might be forced to remain tighter for longer. This is a reversal from expectations that were in place before the war. However, the prospect of higher energy prices means that the central bank will have a hard time “guessing” where inflation truly is. However, the pound will probably outperform against currencies other than the dollar but might look particularly interesting against the Franc and the Yen in this scenario.
A sign of progress from the Middle East talks could drive the pound higher, at least against the US dollar. This should coincide with lower rates in the US, making the greenback less attractive. Make sure to watch the 10-year yield in America, as the further it drops below 4.30%, the more likely we will see USD weakness.