The Morning Update

The USD holds steady, oil prices rally, equity markets are down, and US yields rally amid fresh Israel and Iran attacks. The U.S. dollar traded broadly flat to slightly softer in early trading as investors paused after the greenback's recent advance to two-month highs. Markets remain focused on escalating Israel-Iran hostilities, with fresh military exchanges reinforcing geopolitical uncertainty, although traders appear reluctant to extend long-dollar positions ahead of upcoming U.S. inflation data and the Federal Reserve's June policy meeting. Global equity markets fell in early trading as investors continued to rotate out of technology and AI-linked stocks amid concerns over stretched valuations and rising funding costs. Asian and European markets moved lower, while U.S. futures pointed to a weaker open following last week's sharp selloff in semiconductor shares and renewed doubts about the sustainability of the AI-driven rally. Investor sentiment was further dampened by escalating tensions between Israel and Iran, which have reignited concerns over energy markets and the broader economic outlook. Elsewhere, oil prices rallied as ongoing tensions between Israel and Iran continued to support concerns over regional energy supplies. Gold prices weakened, while bitcoin strengthened as investors rotated into higher-risk assets despite the uncertain geopolitical backdrop. Today sees a light economic calendar, so forcus will remain on the Middle East for intraday guidance to currency markets.

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News Headlines. Explosions heard in central Tehran as Israel and Iran trade air strikes. Global stocks slide, led by a meltdown in South Korea. China's Xi lands in North Korea for a meeting with Kim. Oil prices jump after Iran missiles threaten fragile ceasefire. Tumbling tech puts the brakes on the AI rally; Middle East escalation lifts oil prices. Earthquake of magnitude 7.8 strikes off southern Philippines; 32 feared dead. Ottawa to direct CRTC to scrap demands for streamers to fund local news and niche broadcasters. Almost 10% of Toronto mortgage holders won't qualify to refinance next year, BoC says. ECB risks repeating 2011 mistake with rate hike.

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In currency markets. Against the U.S. dollar, major currency markets held relatively steady in early trading as investors adopted a cautious stance ahead of key U.S. economic data and ongoing developments in the Middle East. While elevated geopolitical tensions continued to provide underlying support for the greenback, traders were reluctant to take aggressive positions as they awaited further clarity on the U.S. labour market outlook and prospects for U.S.-Iran diplomacy.

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In commodity markets. Oil prices rallied 4.2%. Natural Gas & Silver prices tumbled 3%. Gold prices weakened 1.1%. Copper prices gained 0.6%. Coffee prices advanced 1%. Soybean prices slipped 0.2%, while wheat prices firmed 0.35%.

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CAD remained under pressure in early trading, with USD/CAD testing the 1.3950 level as investors weighed Canada's recent technical recession against stronger-than-expected May employment data. While Friday's robust jobs report helped revive expectations for further Bank of Canada tightening later this year, markets remain cautious ahead of Wednesday's BoC interest rate decision. Broader themes, including U.S.-Iran negotiations, CUSMA trade discussions and overall risk sentiment, are also expected to remain key drivers of the loonie in the near term.

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EURCAD firmed in early trading as support from Thursday's ECB rate hike and expectations of further policy tightening continued to underpin the euro. Meanwhile, the Canadian dollar remained constrained by concerns over weak domestic growth, trade uncertainty and caution ahead of Wednesday's Bank of Canada interest rate decision. With the ECB maintaining a hawkish bias while the BoC is expected to remain on hold, the cross remains biased to the upside in the near term.

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EUR held steady in early trading as support from Thursday's ECB interest rate increase and expectations of further policy tightening offset weaker-than-expected German factory orders data and lingering concerns about Eurozone growth. Persistent geopolitical tensions in the Middle East continued to underpin demand for the U.S. dollar, limiting upside for the single currency. Investors will remain focused on developments surrounding U.S.-Iran negotiations and broader market risk sentiment for fresh direction.

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GBPEUR traded broadly flat in early trading as weaker-than-expected German factory orders data weighed on the euro, offsetting support from expectations that the ECB will raise interest rates at its policy meeting on 11 June. Sterling also struggled to gain traction as investors continued to assess the Bank of England's more cautious policy outlook, with markets scaling back expectations for aggressive UK rate increases. Markets remain focused on the divergence between ECB and BoE policy expectations, alongside broader risk sentiment, for fresh direction.

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GBP edged higher in early trading as the U.S. dollar eased slightly following its recent rally, allowing sterling to recover modestly from recent lows. However, ongoing tensions in the Gulf and stalled U.S.-Iran negotiations continued to bolster the greenback's broader safe-haven appeal, limiting gains. Investors will also be monitoring upcoming UK economic data and Bank of England commentary for further clues on the outlook for UK interest rates.