SIFs Move Higher on Hormuz Talks

MACRO FRAME

With another hold on policy, markets look to jobs data in the US and Fed speak, while the US-Iran backdrop continues to offer uncertainty.

STOCK INDEX FUTURES

Equity index futures moved higher overnight, supported by President Trump’s comments about “very good discussions” and an all‑day negotiation with Iran, which have fueled expectations of a near‑term deal to reopen the Strait. Axios reports confirm that the US and Iran are closing in on an interim agreement to reopen the Strait with Oman’s consent, while the US is aiming for an announcement on Wednesday. Elsewhere, enthusiasm surrounding some certain high-profile AI names has lifted risk sentiment. The broader theme of the AI trade remains that while AI demand is robust, capex-heavy companies that burn cash will be penalized if near-term returns cannot prove sizeable. Strong AI investment, resilient economic data, solid earnings growth, remain in place, which should offer support to the continuation of the markets rally.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index slipped 0.16% to 99.70, to land near a six-month low. Lower oil plus “peace” headlines have led traders to trim expectations of a Fed hike in September from about 70% at the start of the week to just under 60% this morning, weighing modestly on the dollar. However, the market remains fully priced for a hike in December. The dollar has lost some support in interest-rate differentials, in the form of policy-rate expectations, which have been a dominant driver of dollar direction in recent months. DXY remains particularly vulnerable to the divergence in policy expectations between Fed and ECB.  Yesterday’s JOLTS data did little to move the needle, showing a labor market that while openings drifted lower, quits and layoffs are settling into a range consistent with moderate wage growth and broad stability.

Watch point: While July’s meeting was taken as dovish, the geopolitical backdrop reinforces an inflationary theme among global economies leading policy expectations to be a dominant driver in currency direction.

EURO: The euro is 0.16% higher to $1.1548. The improved risk tone has been supportive of G10 currencies aside from the dollar. Meanwhile, expectations that the European Central Bank will be more hawkish than the Fed have led to the narrowing of policy rate differentials and at-large market bullishness. Eurozone inflation figures for July suggested that underlying price pressures remain firm with services prices rising alongside non-energy industrial goods. Money market are pricing a 68% chance of a hike in September, though are no longer fully priced in for a move higher in October. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction. In the event of a peace deal between the US and Iran, the market will likely continue to price in risk premium, keeping European bond yields and policy tightening expectations elevated compared to pre-war levels.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations.

BRITISH POUND: Sterling is 0.14% higher at $1.3469. A relatively light calendar week in the UK will lend focus to US-Iran developments and any developments in the new administration on Downing street. The bigger move is the pound-yen cross, up about 0.2% near 212.3. Trump’s comments about “very good discussions” with Iran during all‑day talks have kept hopes of de‑escalation alive and damped some of the energy‑shock risk premium. That backdrop has reduced safe‑haven demand for the dollar, allowing sterling to edge up. The Times reports Treasury officials are exploring raising billions of pounds in extra borrowing by using the flexibility created by the revised fiscal rules. Markets have taken this calmly so far, the current framework allows for more borrowing strictly for investment without breaching headline rules. Largely, the market appears to be digesting this as a shift toward growth‑friendly public investment rather than fiscal loosening. Money markets are no longer pricing in a rate hike by year-end.

JAPANESE YEN: The yen firmed modestly to 157.58 yen per dollar. The yen is still maintaining most of its gains from the recent intervention. While the move by the US and Japan supports the currency in the near-term, a shift in fundamentals is needed to fully reverse the weakening trend. Bank of Japan policymakers debated mounting price pressures at their meeting in June and the need for higher policy rates according to June’s meeting minutes. A few board members expect inflation to rise in the latter half of the current fiscal year as firms plan price hikes. Mainly, the debates highlight a growing focus on inflation inside the board, while most members said the pass-through from higher oil prices had moved at a relatively fast pace for business-to-business transactions, which could spread to consumer prices. The minutes have lifted expectations of a September rate hike from 36% to 45%. For the yen to buck its weakening trend, stronger policy support will be needed from the bank, among other factors.

Watch point: With the recent intervention in the currency, the yen will need strong monetary policy support from the Bank of Japan to prevent further depreciation.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7051. An increase in risk-sentiment across the globe and strong consumer spending data in Australia has lifted the Aussie above the $0.70 level, though market expectations of a rate hike remain dull. Household spending rose 0.8% in June, driven by electric vehicle sales, per the Australian Bureau of Statistics. Spending for Q2 slowed a tick to 0.7% in real terms. While the data does support the Reserve Bank of Australia’s hawkish stance, Q3 inflation figures will serve an outsized role in determining whether or not the bank raises rates. Second-quarter inflation in Australia came in below forecasts, the downside surprise relative to expectations has shifted the policy bias towards a RBA hold for the remainder of the year. Markets are now see just a 2% chance of a hike next month, 11% in September, and are pricing the chance of year-end hike just under 45%.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields are modestly lower, though the curve has maintained its recent steepening move ahead of today’s JOLTS data and Friday’s labor report. The 2/10 and 2/30 spreads has remain near two-month highs, evident that the market could either be pricing higher inflation or stronger productivity growth in the aftermath of strong Q2 earnings and an AI-related productivity boom. The 10-year break even rate at 2.27% remains below its highs in May, suggesting that the markets reaction to Warsh’s comments may be overdone and that strong equity performance in recent days could be responsible for the bounce higher in yields. Oil prices retreated over the last two days, which has been and is likely to be a dominant driver in yield direction. Treasury Secretary Bessent said in a CNBC interview that a deal with Iran to reopen the Strait could come “today or tomorrow,” a move that would likely result in oil prices extending their decline. Today’s JOLTS data will be the next near-term catalyst for yields, though labor market picture remains stable, lending focus on the inflation front to determine yield direction.

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term.

Interested in more futures markets?  Explore our Market Dashboards here.