ECB, Iran Deal Fuel Risk-On Swing; PPI Keeps Yields Elevated

The ECB delivered a 25bp hike as expected, lifting the deposit rate to 2.25%. President Lagarde highlighted the decision's robustness across scenarios, downplayed growth risks, and stressed upside inflation risks. Markets now expect a second hike to 2.50% in September rather than July, with two cuts forecast for the first half of 2027.

That policy signal was quickly overtaken by geopolitics. President Trump said the US and Iran had agreed the final points of a “great settlement” and could sign a peace deal “very soon, maybe over the weekend in Europe.” Brent crude tumbled to around $89 a barrel as the prospect of reopening the Strait of Hormuz and halting planned strikes sank in. Iran countered that a deal had not yet been finalised. The gap between Trump's announcement and Iran's denial sets up a binary risk for the sessions ahead.

Risk appetite flipped sharply. Global equities surged 1.3% on the day, with cyclical stocks leading and defensives lagging. The S&P 500 closed up 1.8%, the Nasdaq gained 2.5%, and the Russell 2000 rose more than 3%. South Korea's KOSPI stood out with an advance of more than 8%. US equity futures extended gains this morning, and the rally spread across Asia. In currencies, EUR/USD reversed from an earlier dip to 1.15 and shot towards 1.16. EUR/SEK collapsed from above 11.00 to close around 10.93.

Oil's collapse is the clearest transmission channel from the peace talks. Brent is now 4.6% lower since yesterday morning, trading near $88.80 a barrel. For forex pairs sensitive to energy costs – the Norwegian krone, the Canadian dollar – the move cuts a key input to inflation and terms of trade. The krone has not yet fully reflected the shift; Norway's own data from the Regional Network Survey showed capacity utilisation falling to 30%, recruitment difficulties dropping to 18%, and growth, employment, and investment all running below Norges Bank's March forecasts. The only exception was wage growth for 2027, expected at 4.1% versus the bank's 3.9% forecast. Together with this week's CPI, the survey reduces the probability of a rate hike at next week's Norges Bank meeting. Our base case is that policy rates have peaked in Norway.

US data added a hawkish counterweight to the risk-on mood. May PPI came in at 1.1% month on month (seasonally adjusted), driven by a 23.4% surge in gasoline prices. Core PPI excluding the volatile trade services category rose 5.1% year on year, up from 4.4%, and accelerated to 0.8% month on month from 0.6%. The report suggests cost pressures are building more broadly across goods and services. US yields ticked slightly higher in response, a reminder that the Federal Reserve's next move is not a rate cut while inflation remains sticky.

Sweden's final May inflation figures confirmed the flash estimate, revised down only at the second decimal. The upside surprise in the flash came from package holidays, which rose 25.8% month on month – unusually early, as such seasonal price increases typically do not occur until June. Statistics Sweden also published a new measure of CPIF excluding energy with constant taxes, which will feed into the Riksbank's assessment of underlying inflation before its policy decision next week.

The Central Bank of Turkey left its one-week repo rate unchanged at 37% for the third consecutive meeting, as expected.

Today's calendar brings UK April GDP, final euro-area inflation prints from Germany, France, and Spain, and the University of Michigan preliminary consumer sentiment index for June. The Michigan index fell sharply in May to 44.8 in the final reading, and consensus expects a modest rebound to 46.0. ECB speakers Kocher, Rehn, and Nagel will offer further colour on yesterday's decision.

For forex traders, the dollar's reversal on the peace-talk news underscores how quickly positioning can shift on binary events. The EUR/USD profile tracks the pair's recent range and volatility. Broader forex market analysis pages follow the cross-asset implications of the macro signals driving the session.

Tehran has not confirmed the deal. Markets are likely to remain sensitive to headlines, with oil and risk appetite trading in lockstep until either a signed agreement or a breakdown in talks crystallises the path.