Oil Extends Surge Above $80, Dollar Holds, JGBs Rally

The Middle East conflict escalation pushed oil prices more than 9% higher on Monday. The front-month WTI and Brent contracts added another 3.6% to 4.6% on Tuesday. The US dollar consolidated those gains. The euro fell to its lowest since the July 3 jobs report, struggling to hold above $1.1400. Options for nearly 3 billion euros at that level expire today. Japanese government bonds rallied, a clear divergence from the broader risk-off tone, after Finance Minister Katayama suggested adding JGBs to tax-free investment accounts.

The oil surge pushed the 10-year Treasury yield above 4.60% for the first time since May 21. The two-year yield rose to new highs for the year. Federal Reserve Governor Christopher Waller warned that the Fed may need to hike rates if underlying inflation remains sticky. The market now prices a 40% chance of a rate hike at the July FOMC meeting, according to fed funds futures.

In Europe, the 10-year Gilt yield surged 10 basis points on Monday. Reports that the likely next UK prime minister, Andrew Burnham, may merge the budget with spending reviews added to the selloff. Gilts are up another 5 basis points today. Italian bonds also rose 7 basis points.

The JGB rally was a clear divergence from the broader risk-off tone. Katayama's suggestion to include JGBs in the Nippon Individual Savings Accounts drove demand. The 20-year bond auction saw strong demand. The dollar held above JPY162, touching JPY162.50 in North America. It remains above JPY162 today.

The euro traded near $1.1380, its lowest since the July 3 jobs report. The low from Monday held. The euro is struggling to re-establish above $1.1400. The next support is at $1.1360, then the June 24 low of $1.1325. Sterling reversed lower after reaching $1.3450 before the weekend. It fell to a three-day low below $1.3350, and slipped to almost $1.3340 today before recovering. Options for 400 million pounds at $1.34 expire today. Sterling's next support is last week's low of $1.3320.

The Canadian dollar was resilient. The US dollar traded near CAD1.4150, settling below its 20-day moving average for the second day. The greenback followed through lower today, approaching support near CAD1.4080. The next important area is around CAD1.3980-CAD1.4000.

The Australian dollar recovered from a three-day low near $0.6915 to reclaim the 20-day moving average at $0.6940. Options for 475 million Australian dollars at $0.6960 expire today. Overcoming Monday's high near $0.6970 would strengthen the technical tone.

Most emerging market currencies weakened. The Mexican peso lost 0.30%. The dollar traded inside the pre-weekend range and is holding above its 20-day moving average. The offshore yuan consolidated in a narrow range, with the PBOC fixing the dollar slightly higher. The Indian rupee continued to weaken, reaching a two-month high near INR96.25.

China's June trade surplus widened to $125.6 billion from $105.4 billion in May. Exports rose 27% year-over-year, imports up 36%. The surplus with the EU hit a record $33 billion, and with the US it rose to $28.9 billion. That will likely increase tensions with the US and Europe.

August WTI reached $81.25, its highest since May 18. The 38.2% retracement of the decline from the contract high of $100.10 is near $79.65. The 50% retracement is around $83.55. The five-day moving average is crossing above the 20-day moving average for the first time since late May.

Equity markets mostly fell on Monday. The Nasdaq posted its lowest close in three sessions, below its five- and 20-day moving averages. The S&P 500 held within the prior Friday's range. In Asia, the CSI 300 rose 2.15%, leading a rebound. Taiwan and India declined. The Stoxx 600 is lower for the second consecutive session. US futures are mixed, with Nasdaq futures up 0.4% and S&P futures slightly lower.

Gold fell nearly 3% on Monday, its largest decline in over a month. It slipped below $3984 today before recovering to about $4034. Silver fell 3.7% and is near $58.

The June CPI report is due at 8:30 a.m. ET. The median forecast calls for a monthly decline in the headline, the first since May 2020. The core rate is expected to rise 0.2%, leaving the annual rate at 2.9%. The Fed's Beige Book is due on Wednesday. Chair Warsh testifies before the House Financial Services Committee today. JPMorgan and Goldman Sachs are among the large banks reporting earnings this week.