Markets on edge as Israel-Iran tensions escalate risking a broader regional conflict

Daily Currency Update

Having vanquished high inflation the ECB is presently considering a review of their longer-term strategy as well as its policy toolkit which has formerly included massive bond purchases and negative interest rates which it deployed over the last decade when price growth was too sluggish. These quantitative easing (QE) measures had drawbacks creating bubbles in property and financial markets setting the ECB up for large losses once borrowing costs began to rise. ECB policymaker, De Guindos, said, “all the tools used in the past remain at the ECB’s disposal but that he and his colleagues have become aware of their drawbacks.”

Money markets expect the Bank of England to leave interest rate unchanged at 4.25% when they meet this Thursday but are pricing in two more 25 basis point cuts by year end, the first of which is expected in September. The Pound has faced a series of weaker economic data with manufacturing activity, employment and economic growth all slowing in the last week. Adding insult to injury a spending review by finance minister, Rachel Reeves, did little to improve the outlook for economic growth and raised the chances of tax hikes in Britain later this year.

The Dollar held ground in choppy trading yesterday as investors closely monitored the fighting between Israel and Iran for signs that it could escalate into a broader regional conflict which in turn lent support for the “safe haven” Dollar. That said, investors remain highly nervous over Trump’s deadline for trade deals due in three weeks as agreements with major trading partners including the EU and Japan have yet to be signed. Markets will be focused on the Group of Seven (G7) nations when they meet in Canada this week bracing themselves for additional tariff event risk.