Markets remain firmly focused on the Middle East after the US launched a second consecutive day of strikes against Iranian targets. President Trump warned of further military action unless Tehran agrees to a peace deal, while uncertainty around shipping through the Strait of Hormuz continues to fuel concerns over global energy supplies. Brent crude briefly moved back above $95/barrel, keeping inflation concerns elevated and supporting safe-haven flows into the dollar.
While headline US CPI accelerated sharply due to higher fuel prices, the underlying inflation picture was more encouraging. Core CPI rose only 0.2% in May, suggesting that broader inflation pressures remain relatively contained despite the energy shock. The softer core reading has reduced immediate concerns about further Fed hikes and provided some relief to risk assets. However, markets remain cautious as higher oil prices could still feed through into transport and production costs in the months ahead.
The SARB's latest Financial Stability Review highlighted growing risks to South Africa's financial system from the Iran conflict, rising inflation and capital flow volatility.
Importantly, the Bank signalled that expectations for interest rate relief have diminished, with additional rate hikes remaining a possibility should oil prices, inflation expectations or the rand deteriorate further. FRA markets continue to price in at least two more hikes, reinforcing the higher-for-longer local rates narrative.
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