Title: Dollar set for weekly gains amid Israel-Iran war

Dollar is the safe-haven proxy of the Israel-Iran war

The dollar traded mixed against its major counterparts yesterday, losing some ground against the euro, the pound and the franc, while outperforming the yen, the aussie, the kiwi and the loonie.

The dollar is headed for its biggest weekly advance in over a month, as the Israel-Iran air war prompted market participants to seek shelter in the world’s reserve currency. The conflict is entering its second week with no signs of subsiding, keeping market participants nervous about the possibility of the US getting involved.

That said, the White House said that President Trump will decide whether the US will join Israel within the next couple of weeks, which somewhat helped to soothe investors’ fears about an imminent US attack on Iran. That’s maybe why the dollar is trading unchanged or lower against its peers today.

Risks of lower Iranian energy supply support oil

However, the risk of escalation to a broader Middle East conflict remains elevated as Israel bombed more nuclear targets yesterday and Iran fired more missiles and drones after hitting an Israeli hospital. The fact that investors remain concerned is evident by the sharp rebound in oil yesterday, although prices pulled back later in the day and are hovering around $75 per barrel today.

BoE sounds concerned about economy and labor market

Besides the Middle East saga, though, market participants had to digest four major central bank decisions this week. The Bank of Japan remained on hold on Tuesday, announced a slowing of its bond tapering, and remained cautious about future hikes. The Federal Reserve also stood pat on Wednesday but appeared more concerned about the upside risks of inflation.

Yesterday, attention shifted to the SNB and the BoE. The SNB cut interest rates by 25bps to 0% and kept the door open to negative interest rates. There is actually a 30% probability of a 25bps rate cut in September.

As for the Bank of England, it held interest rates untouched at 4.25% as expected, but this was via a 6-3 vote, with the three dissenters voting for a 25bps rate cut. The forecast was for only two supporters of a rate cut. Policymakers said that uncertainty surrounding trade is likely to continue weighing on the British economy, also highlighting the risks of a weaker labor market.

The pound slipped somewhat at the time of the decision perhaps as investors saw the outcome as slightly more dovish than previously thought, but the currency was quick to rebound and trade even higher later in the day. This may have been due to comments by Governor Bailey, who said that expectations of interest rates moving gradually lower are not a prediction about the August meeting. Still, there is a strong 57% probability for a 25bps reduction in August.

Stock futures point to a lower open today

Wall Street will resume trading today after remaining closed yesterday in observance of the Juneteenth holiday. Stock futures are suggesting that the S&P 500 will open slightly below the levels it closed at on Wednesday, perhaps due to the Fed’s hawkish hold.

The Fed’s wait-and-see stance, the uncertainty surrounding Trump’s trade policies, and fears about further escalation in the Middle East increase the chances of a more meaningful correction, although the bigger picture remains cautiously positive, at least from a technical standpoint.