Focus turns to June CPI data

The Aussie started the week relatively strongly, supported byencouraging developments in the Middle East and the accompanyingslide in Brent crude. The currency, however, gave back ground as the USdollar showed some renewed strength alongside Governor Bullock'sspeech, which markets interpreted as broadly dovish. Focus now turns totoday's June CPI print, followed by Thursday's FOMC meeting.Middle East headlines have been the dominant driver in markets thus farthis week. Brent crude fell to as low as US$85/bbl after reports thatWashington and Tehran are working toward a renewed peace deal, withthe US holding off strikes since Friday after thirteen consecutive nightsof attacks, and Iran signalling it would avoid retaliation while holding talkswith Oman over the Strait of Hormuz. Trump said the pause was intendedto give negotiations more room.The sell off in oil was compounded by resumed loading at the CaspianPipeline Consortium terminal on Russia's Black Sea coast, following lastweek's drone attacks. Risks of further disruption remain elevated,however, with Saudi Arabia still facing challenges from the Houthis.Transits through the Strait of Hormuz also remain limited, underscoringhow fragile the improvement in sentiment remains.Governor Bullock's speech and the subsequent Q&A session was largelyviewed as dovish, with the Aussie falling post the speech. She flaggedthat some parts of the economy are cooling, with demand, the labourmarket and housing all easing by more than the Bank had expected.Bullock did retain some caution, reiterating that underlying inflationremains too high and that further hikes remain possible. Today's June CPI print will offer an early read on whether the underlyinginflation concerns Bullock flagged are still building. We expect headlineinflation to rise 0.5% MoM (0.4% seasonally adjusted), lifting the annualrate to 4.3% from 4%, a touch below the 4.4% Bloomberg consensus.While a headline beat could support the Aussie, we think the RBA's focuswill sit squarely on the trimmed mean measure, which has surprised tothe upside in recent months and which the May SMP forecast has risingto 3.8% in June. A print above this would sharpen the case for furthertightening. We continue to expect the RBA to hold until mid-2027 beforecutting, with the broader domestic slowdown likely to limit anybroadening out of price pressures. That said, the recent escalation in theMiddle East remains a renewed risk to that view.Attention will then shift to Thursday's FOMC meeting. While we don'texpect a rate hike, markets are currently pricing around a 40% probabilityof a rate rise. That said, we do expect the Fed's communications to leanfirmly hawkish. The statement itself will likely stay brief, consistent withChair Warsh's evident preference for avoiding explicit forward guidance,but the broader messaging should signal to markets that hikes remain onthe table should the conflict in Iran persist and oil prices hold around orabove current levels for a sustained period.