ECB, Fed, BoJ: The Triple Tightening Threatening Global Markets

ECB Takes Center Stage as Energy Revives Inflation Concerns

According to Reuters, the European Central Bank is expected to raise its key interest rates at its meeting on Thursday, becoming the first major central bank to further tighten its policy since the outbreak of war against Iran. Eurozone inflation rose to 3.2% year-on-year in May, according to Eurostat, driven by a rebound in the underlying component and services.

This trend fuels concerns of second-round effects in an environment where growth is significantly slowing. The oil shock, originating from the de facto closure of the Strait of Hormuz and the persistent threat to navigation in the Red Sea, directly increases European production costs.

The challenge for the ECB is to manage inflation expectations without exacerbating the already observed slowdown. For holders of eurozone sovereign bonds, the timing of this tightening and the tone of the accompanying statement are key elements to watch, as the term premium already reflects some of the anticipated tightening.

Tokyo on Edge: 10-Year JGB Highlights Japan's Energy Dependency

In Japan, the yield on the 10-year government bond rose by 5 basis points to 2.715%, its highest level since late May, according to Reuters. Markets are now almost fully pricing in a rate hike to 1% by the Bank of Japan during the June 15-16 meeting.

The Japanese Minister in charge of Economic Revitalization has called on the BoJ to work « in close cooperation » with the government to stabilize inflation around 2%, while acknowledging that rising yields are weighing on the real economy. As a massive net importer of hydrocarbons, the archipelago is taking a direct hit from the rising cost of crude, which saw an intraday peak of about +5% following the Iran–Israel strikes before partially easing, according to Reuters.

This equation (imported inflation, rising yields, yen under pressure) places the BoJ in an uncomfortable position. The gradual exit from a decade of ultra-accommodative policy comes at the worst time in the global energy cycle, amplifying the sensitivity of Japanese bond markets to any resumption of hostilities in the Middle East.

Dollar Rises and Falls: The Fed Maintains Control Over Asset Hierarchy

The dollar remains close to a two-month high, supported by both the demand for safe-haven assets due to uncertainty in the Middle East and the approximately 70% likelihood of a Fed rate hike by December, according to Fed funds futures tracked by CME FedWatch. This trend continues the momentum observed after the U.S. employment report in May, as detailed in our analysis on the dollar reaching a two-month high and reigniting the scenario of a Fed hike.

Spot gold was moving towards $4,332 per ounce, after hitting a low of $4,268.4 per ounce the previous day. The yellow metal remains caught between its traditional role as a safe haven amid geopolitical risks and the pressure from expectations of higher U.S. benchmark rates, which increase the opportunity cost of holding it.

Meanwhile, China reported very robust foreign trade totaling 4,450 billion CNY in May (+16.9% year-on-year), with exports up by 13.8% and imports by 21.5%, according to the General Administration of Customs. However, these figures should be interpreted with caution: base effects, billing delays, and the reorientation of flows under geopolitical constraints obscure the real signal.

It's important to note that these market expectations reflect the current state of positions and can change rapidly: any resumption of hostilities between Iran and Israel, a prolonged closure of the Strait of Hormuz, or an escalation in the Red Sea could significantly alter the trajectory of oil, currencies, and sovereign rates.