A US-Iran agreement, including the end of hostilities and reopening of the Strait of Hormuz, remains reportedly close but is yet to be signed. Those developments sent brent crude below US$90/bbl for the first time since March, while global bond yields declined in response. Markets have been expecting a full deescalation for some time and have become less reactive to headlines, so these latest positive developments failed to drive a more convincing rally in risk assets. As expected, the ECB hiked rates, with attention now turning to the Fed's meeting next week. The RBA is also due to meet but should pause after three consecutive hikes.
The ECB hiked its three key rates by 25bps for the first time since 2023 this week, increasing the main policy rate to 2.25%. The move had been strongly signalled in ECB communications since the previous meeting, reflecting concerns over the energy price shock from the Middle East conflict sparking a broader inflationary episode. President Lagarde made two key justifications for hiking rates in the post-meeting press conference amid broader criticism of a policy error.
Firstly, the decision was unanimous amongst Governing Council members, and secondly, hiking was 'robust' across all forecast scenarios published in the ECB's latest macroeconomic projections. Those projections raised the outlook for inflation and lowered forecast growth in 2026 and 2027. Uncertainty lingers over rates moving forward. Post-meeting reporting quoting ECB sources indicated that a follow-up hike in July was possible while other reports suggested a pause was likely. Market pricing largely factors in two more rate increases by year-end.
US inflation data on the eve of the Fed's meeting next week reaffirmed market expectations that the key debate is whether rates are set for an extended pause or if a hike will eventually be required. The post-meeting press conference will be the first for Kevin Warsh and will give markets a sense of how the new Fed Chair sees policy evolving. Headline CPI in May came in at 0.5%m/m, lifting the annual pace from 3.8% to 4.2%, a high since April 2023. Key drivers related to the energy price shock, with gasoline up 7% and airline fares rising 2.7%. Core inflation (excluding food and energy) was slightly softer than anticipated at 0.2%m/m and 2.9%yr, up from 2.8%.
Australian data was limited to consumer and business surveys. The Westpac-MI report showed consumer sentiment declined 2.9% in June, largely reversing the modest improvement (3.6%) in May. Sentiment has fallen almost 15% so far in 2026, with the RBA's hiking cycle a major concern for households, adding to cost-of-living pressures. The RBA is, however, widely expected to hold rates steady next week. The NAB Business Survey reported trading conditions remained slightly below average in May, with the major effects of the current backdrop being reflected in weak confidence. Margins are coming under pressure, with input costs rising by more than selling prices.
