The intensity of the Middle East conflict went up several more notches overnight amid speculation the U.S. military would join the attacks on Iran.
The central question now is whether the U.S. air force would be involved in any attempt to take out Iran's underground nuclear enrichment facilities, particularly the Fordow plant.
An Israeli military strike on Iran's nuclear complex at Natanz directly hit the underground uranium enrichment operation there, the U.N. nuclear watchdog said on Tuesday, after initially reporting only indirect damage.
Markets have to calculate whether we're apt to see a long drawn-out war and related energy disruptions or a shorter and more decisive outcome that could could limit any hit to Iranian crude supply.
Back home in the U.S., any energy shock would be economically and politically sensitive. And it's unclear how much public support there would be for involvement in the sort of foreign wars Trump campaigned to keep America out of.
So far, U.S. crude prices remain relatively contained despite the war, slipping back slightly again on Wednesday to just under $75 per barrel.
Even though spot prices have risen about 14% since the start of last week, they have not breached intraday highs set last Friday nor the $80-plus peak hit in January, and they also remain down 7% year on year. What's more, crude prices remain below the average of the past two years since the latest wave of Middle East conflict was triggered by Hamas's Oct 7, 2023 attack on Israel.
Gold price moves have also been moderate over the past week, as the prices of the safe haven has failed to hit new records set in April and has slipped on Wednesday. The dollar and Swiss franc both edged lower again too today, the latter impacted by a likely interest rate cut to zero from the Swiss National Bank tomorrow.
U.S. stock futures were higher ahead of the open after a near 1% drop in the S&P 500 index on Tuesday.
The Fed decision, press conference and new economic projections later today will keep many markets in check, however, not least as they come before the U.S. 'Juneteenth' public holiday and market closures on Thursday.
No change in the Fed policy rate is expected, especially now that the edgy energy outlook is adding to the already uncertain U.S. import tariff picture. But the Fed's nods and winks about its future course will be crucial as always, not least its 'dot plot' of policymakers' expectations on future rate moves.
The most recent set of quarterly projections penciled in two more rate cuts by yearend, but there's some speculation that may reduced to one in today's update. As of Wednesday, futures markets were pricing in 45 basis points of easing by December.
Treasury yields fell back ahead of the meeting, following a series of soft U.S. economic readings for May on retail, industrial activity and housing.
Treasuries got an additional lift as the Fed announced a board meeting for June 25 to consider plans to ease leverage requirements on larger banks, kicking off what is expected to be a broad effort to reconsider bank rules.
Changes to the so-called "supplementary leverage ratio," which requires banks to set aside capital against assets regardless of their risk, could enable banks to hold more Treasuries.
Elsewhere, stocks were mixed to higher around the world, with Hong Kong underperforming and European defense stocks a big gainer.
Sweden's crown weakened after the Riksbank cut its key interest rate to 2.0% from 2.25% as expected on Wednesday, saying it may ease further before the end of the year.
And Bitcoin remained relatively subdued even after the U.S. Senate on Tuesday passed a bill to create a regulatory framework for dollar-pegged cryptocurrency tokens known as stablecoins, seen by some as a watershed moment for digital assets.
Now on to today's deep dive, which looks at whether the dollar's steep losses this year may already have run their course or whether this is longer-term exit from the currency.
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