22/05/2026 Daily Reports
FX Daily: Iran Fallout Starts Hitting Europe Harder
- Markets are entering a new phase where the economic fallout from the Iran crisis is increasingly weighing on Europe rather than the US.
- EUR/USD is starting to reflect a classic stagflationary pressure:
- weaker growth
- persistent inflation
- fading ECB tightening expectations
- European PMI data this week came in weak and signaled deteriorating activity across the eurozone during Q2.
- Markets previously believed the ECB would aggressively tighten policy to offset inflation risks from the energy shock.
- That optimism is now fading quickly:
- ECB tightening expectations dropped from 85bp to around 65bp
- Some analysts now expect only one more ECB hike in June
- Meanwhile, the Fed outlook continues turning more hawkish.
- Markets are now pricing nearly 20bp of Fed hikes by December as inflation concerns continue building in the US.
- Chicago Fed President Austan Goolsbee warned that “a pretty significant inflation problem” is developing.
- Investors are now closely watching Fed Governor Christopher Waller’s speech for any hints about future tightening.
- The key macro shift is that the Fed may now prioritize inflation control more aggressively as the US labor market remains relatively stable.
- Higher US real yields continue strengthening the dollar and pressuring EUR/USD lower.
- In Turkey, political uncertainty triggered fresh volatility:
- pressure on the Turkish lira
- spike in implied TRY yields
- defensive positioning across local markets
- Reports suggest the Central Bank of Turkey may have spent roughly $6 billion defending the lira during yesterday’s volatility.
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