Oil prices rose on Monday, with OPEC+ confirming a production increase of 411,000 barrels per day for July, continuing the trend from May and June. This hike coincides with geopolitical tensions after Ukraine’s drone attacks on Russia, while U.S. Senators propose sanctions that could tighten energy markets further.

The U.S. dollar weakened broadly, while the yen gained strength after the Bank of Japan increased provisions for potential Japanese Government Bonds losses. The BoJ’s decision, including raising the provisioning ratio to 100% for fiscal 2024, indicates preparation for higher interest rates, boosting confidence in yen assets.

Federal Reserve’s Position on Rate Cuts

Federal Reserve Governor Christopher Waller expressed openness to rate cuts later in the year, suggesting that tariff-driven inflation should not overly influence monetary policy. Waller stressed that if tariffs remain low and core inflation drops, rate cuts might be suitable.

Asian factory activity in May faced challenges due to trade tensions and Chinese oversupply. Manufacturing PMIs in Japan, South Korea, and China stayed in contraction, though Japan’s PMI edged to 49.4. Business confidence improved, with employment rising as firms anticipated demand recovery.

China dismissed U.S. accusations of trade deal breaches as “groundless,” asserting adherence to the Geneva agreement. The U.S. had imposed export controls and visa revocations, which Beijing claimed destabilised trade relations.

Poland’s Political Shift

In Poland, nationalist Nawrocki’s presidential win aligns with right-wing policies, contrasting with recent pro-EU leadership.

What we’ve seen here is a consistent sequence of events painting a fairly directional picture for markets—particularly those tied to macroeconomic flows and energy-linked products.

Oil has been buoyed by a blend of production restraint and conflict-related risk. With OPEC+ adding only a modest sum to output—411,000 barrels per day—this still reflects managerial caution rather than expansionism. In light of recent Ukrainian drone strikes inside Russian territory, risk premiums have inched higher. This isn’t merely headline noise; it introduces plausible threats to both supply infrastructure and investor sentiment. The chance of more sanctions emerging from Washington—already flagged by Senators—adds another price-supportive dynamic. For those trading derivatives tied to crude, that sort of environment challenges short gamma exposure and might make longer-dated call structures more attractive, provided implied volatility does not overshoot realised movement.

In currency markets, the greenback’s downward tilt stood out. Broadly speaking, its regression can be linked not so much to domestic weakness but to relative pronouncements elsewhere. The yen, for example, gained ground—not through outright intervention, but due to higher provisioning from the Bank of Japan. By shifting their reserves model and establishing a full coverage policy on JGB losses, the BoJ signalled a latent openness to rate lifts. That kind of forward-looking policy hardening reflects building internal confidence in the economy’s ability to digest costlier debt. It’s worth noting that these aren’t yet outright rate hikes, but from a valuation perspective, long yen positions gained implicit support.

We’re also hearing from Waller of the Fed, who mentioned that inflation triggered by trade or tariffs won’t necessarily force a defensive stance from policymakers. He clarified that provided core inflation continues to ease and tariff hikes remain contained, downward rate adjustments could return to the table. This matters, because it tells us that reaction functions will be more dependent on structural inflation than political interventions. If we assume futures markets already price in a fair amount of dovishness, there’s utility in examining skew and tail probabilities in rate-linked contracts.

Asian industrial data was underwhelming, though one detail stands out: while PMI gauges for Japan, Korea, and China remain under 50, there’s a divergence beneath the headline. Japanese employment rose, and business outlooks turned a bit more upbeat. With slightly less pessimism around domestic demand, one might look to lean into relative value expressions—long Nikkei-linked exposures versus China-heavy trade baskets. Manufacturing oversupply from the Chinese channel remains a headwind across the board though, and that won’t evaporate with rhetoric alone.

As far as U.S.–China trade tensions go, Beijing’s rebuttal of recent accusations—specifically around Geneva convention adherence and export-control violations—was swift. The Americans’ move to introduce additional visa limits and control measures is seen not merely as procedural tightening but as an escalation that starkly impacts capital flow assumptions for the region. For market participants modelling exposure to Asia-Pacific derivatives, it’s worth incorporating longer latency effects: sanctions don’t always produce immediate volatility, but they can distort roll yields and relative performance between ADRs and their domestic counterparts.

Politics in Eastern Europe also nudged sentiment today. The election of Nawrocki in Poland marks a turn back toward conservative policymaking. While executive power is not absolute there, the rhetoric already contrasts with Warsaw’s recent EU-friendly policies. Currency futures based on regional pairs may begin to reflect these leanings—perhaps more noticeably in cross-border capital flows or minor bond markets than in top-tier sovereign pricing. Nevertheless, the perception of divergence—with Brussels likely attempting to steady policy cohesion—could introduce fresh stress into euro-aligned sentiment indices.

Create your live VT Markets account and start trading now.