* Iran won’t join next US talks without five conditions met

* Crude prices up 3% as hopes fade for US-Iran peace deal

* US inflation rate jumps again as energy costs heap pressure on Fed

* S&P, Nasdaq retreats from record as tech rally cools off

FX: USD picked up a bid on subdued risk sentiment, a sharply falling GBP and hotter than expected CPI. Inflation jumped to its highest in three years with gasoline the big driver, up 28.4% y/y. Crucially, core, which strips out energy and food prices, were also above estimates. Middle East conflict risks have risen as peace talks have stalled, pushing oil and Treasury yields closer to psychological levels. The important 2-year yield is very close to the key 4% level, the 10-year is nearing 4.5% and 30-year above 5%. Elevated energy prices may see markets worry more about growth risks amid demand destruction, at some point. The 100-day and 200-day SMAs sit at 98.44/52 with the 50-day at 98.98.

EUR was mid-pack among its peers as June ECB rate hike bets remain high, above 80%. That offers a lot of room for disappointment with comments by Lagarde and Lane a focus for today. Sentiment is currently the main driver though with broad USD strength meaning choppy price action for the euro. The 200-day SMA resides at 1.1680 and support also at the 38.2% Fib retracement (1.1667) of the January to March pullback.

GBP slid and underperformed as the days of PM Starmer’s premiership looked done, certainly at the start of the day. But while he revealed his intention to battle on, more resignations in the government through the day ramped up the pressure for him to change his mind. The 100-day SMA is 1.3479 with the 50-day and 200-day at 1.3424/20, with the midpoint of the January to March move at 1.3514.   

JPY rose above the 100-day SMA at 157.35 with focus on US Treasury Secretary Bessent’s meeting with Prime Minister Takaichi, Finance Minister Katayama, and BOJ Governor Ueda. Comments have offered little beyond a statement of confidence in the Japan-US relationship and a commitment to continued economic cooperation. The minutes of the recent BoJ meeting suggested a growing desire to deliver a near-term rate hike. Markets are currently pricing 19bps of tightening for the June meeting.

US stocks: The S&P 500 lost 0.16% to close at 7,401, the Nasdaq closed down 0.87% at 29,065 and the Dow Jones settled higher by 0.11% at 49,766. Sector performance was mixed, with Health Care, Consumer Staples, Financials and Energy outperforming, while Consumer Discretionary, Technology and Industrials lagged. Tech weighed on the broader market as semiconductor names saw profit taking after recent mega outperformance, which we wrote about yesterday. Indices did pare most of their losses into the close as chip stocks bounced from intraday lows without a clear driver. Apple and Nvidia both hit new all-time highs. Hims & Hers Health fell 14% after a surprise loss per share and a miss on revenues.

Asian Stocks: Futures are mixed. APAC stocks traded mixed with geopolitical tensions high and no Middle East diplomatic solution near. The ASX 200 was dragged down by weakness in tech, financials and health g commodity gains. The Nikkei 225 was choppy on yen weakness but hawkish BoJ minutes and record Softbank earnings. The Shanghai Composite and Hang Seng were varied with the latter helped by local tech earnings and the mainland awaiting the looming Trump-Xi summit.

Gold fell as prices pulled back after touching the 50-day SMA at 4,776. Treasury yields and the dollar moved higher as oil prices jumped 3%.

Day Ahead – Volatile UK Politics

If you trade GBP, then Gilts are currently the key to price action at present. They underperformed sharply as yields hit fresh long-term highs. PM Starmer’s position looked untenable at the start of Tuesday, but he has said he will not be setting out a timetable for his departure. Nearly 100 MPs have called for him to resign but someone needs to put themselves forward to launch a leadership challenge.  Starmer’s comments were significant as it potentially signals that Chancellor Reeves will remain at her post in the near-term. Moving forward, the only real imminent challenge would be Wes Streeting, though Angela Rayner is an outside possibility. This, however, could bring further division into the Labour party, as an early challenge might split Labour between Starmer, Streeting and Burnham supporters. Look for a formal challenge and/or more ministerial-level resignations in a bid to pressure Starmer into changing his mind.

Britain suffers from the same malaise of high debt and low growth that infects the rest of Europe. Now its governing party is embroiled in a potentially messy civil war. Betting markets still have the odds of a Starmer departure at roughly 50% by June 30 and above 80% by the end of the year. The major risk for the UK remains centred on the fiscal outlook and the loss of confidence associated with a change in Chancellor, given the reassurance provided by Reeves and her adherence to self-imposed rules. The big concern is that Starmer’s successor will borrow more.

Chart of the Day – GBP/JPY just below long-term resistance

Since the Liberation Day lows last April, the popular pair has been rising in a fairly neat bull channel, with a series of higher highs and higher lows. Prices more or less tracked the 100-day SMA with a sharp 2-day sell-off in mid-February pausing the upward rally. But bulls got their way again as the move made fresh highs at 216.59, just above the long-term top from 2008 at 215.89. This is strong long-term resistance and the cross has fallen back to the 50-day and 100-day SMA around 213 and 212.08. This looks like bullish consolidation before another push higher into those peaks. A break higher could be tough if PM Starmer and the political situation in the UK gets chaotic. The fear of a more left wing leader and looser fiscal policy is real and would likely put pressure on sterling. A support zone sits around 208.11 and 208.98.