Upcoming week will be crucial for economic direction
In a new turn of events, the escalating tensions in the Middle East, following Israel's attack on Iran and Iran's subsequent retaliation have worsened the geopolitical climate in the area. This troubling development has raised concerns among traders about potential supply disruptions in the Middle East. The immediate market response involved a retreat from equities, with investors flocking to safe-haven assets, benefiting oil and gold prices right away. The situation's progression will depend largely on how events in the region unfold, and it remains to be seen how much the conflict will escalate and who else may become involved.
In light of the rising tensions, oil experienced its largest single-day gain since March 2022, with prices spiking nearly 13 percent at one point before settling back somewhat.
This surge is attributed to fears of supply interruptions, which could be influenced by margin calls and traders covering their short positions. The market was clearly unprepared for this surge, leading to a spike in risk premiums. If conditions stabilize, prices could decline unless supply disruptions occur, especially through the Strait of Hormuz.
The pressing question remains how long this uncertain situation will persist and when it may subside. If oil prices continue to rise without any relief, the economic impacts could be significant globally.
The inflationary pressures in the US, which had reduced in recent months, could be adversely affected if oil prices remain elevated.
The Federal Reserve is anticipated to maintain its interest rates this week, while the market, which has been pricing in a potential rate cut in the coming months, will be closely monitoring these developments, as high oil prices may delay any cuts, especially with tariff threats still on the horizon.
Some market participants are already discussing the possibility of a rate increase by the end of the year.
Recent economic reports indicate that US consumers are experiencing hardships and the manufacturing sector is facing significant strain due to escalating costs. Additionally, delays in trade agreements are negatively impacting the US job market. Historically, such conflicts have bolstered the USD but this time, despite the USD being weakened and oversold, it has not made significant gains, likely because investors are unloading US stocks and are hesitant to invest in US assets.
However, if the situation deteriorates further, investors are likely to turn to the USD, which retains its status as a safe haven. The USD Index, currently at 98.18, is notably oversold and has ample potential for correction.
In the Eurozone, the economy continues to face difficulties, with the manufacturing sector seeking relief from rising prices and calling for lower interest rates.
Although reduced oil prices had provided some support, the unexpected spike in oil prices last week could diminish consumer confidence, possibly hindering economic growth if prices remain high.
A lot hinges on Saudi Arabia, which could potentially increase its oil supply but the challenge is that it requires over $ 90 per barrel to balance its budget. Its non-oil sector growth is also tied to oil prices. Interestingly, despite oil prices plummeting to a four-year low last month, Saudi Arabia and its OPEC Plus partners have announced a monthly increase in oil production for the second consecutive time to stabilise prices.
Meanwhile, the USD has not capitalized on the unrest in the Middle East. The Japanese Yen initially rallied on conflict news but lost steam by the weekend's close, while the Swiss franc gained some strength. Unlike the USD, which is losing investor confidence amid trade disputes, growth issues, inflation, and deteriorating job conditions, gold prices have risen over 3.5%.
Gold, being considered a low-risk asset, remains a favoured choice for global Central Banks looking to boost their reserves.
Following the current turmoil in the Gulf region, the upcoming week will be crucial for economic direction, with markets closely monitoring whether the Iran-Israel crisis will de-escalate or intensify. Gold prices will also likely react to any developments that could influence market trends.
Next week, the Federal Open Market Committee (FOMC) is set to convene to discuss interest rates, which are anticipated to remain unchanged. Market participants will also be keenly observing the potential direction of future interest rates.
On Monday, the Empire State Manufacturing Survey is expected to be released. On Tuesday, the Bank of Japan will also announce its policy decisions, alongside US Retail Sales figures later that day.
Wednesday will see the US Federal Reserve reveal its monetary policy stance, along with the release of housing starts and weekly jobless claims.
The US markets will be closed on Thursday. However, both the Swiss National Bank and the Bank of England will announce their monetary policy outcomes.
Finally, on Friday, the Philly Fed Manufacturing Survey will be published.
WEEKLY OUTLOOK — June 16-20
GOLD @ $ 3432.50— The market is undoubtedly set for another volatile week, with a positive outlook for gold.
On the upper side, on break of $ 3488, resistance is found at $ 3520, with break risks extending to $ 3585.
Key support to monitor on the downside is at $ 3340. Break would risk for $ 3310.
EURO @ 1.1550— The Euro must surpass 1.1610 to reach 1.1670. It seems it may face challenges when attempting to hit the first upper limit. However, it needs to break through the 1.1420-40 range. Otherwise, it might remain within that range.
GBP @ 1.3566— Pound Sterling has a support level at 1.3440, which is expected to hold, allowing for a potential test of the 1.3630-50 zones before a decline occurs.
JPY @ 144.10— We might see some fluctuations. USD faces resistance near 145.50, which is likely to hold firm. However, a drop below 142.70 could lead us to 141.30. Nevertheless, upside break of resistance could push USD to 147.10.
Copyright Business Recorder, 2025
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