All eyes on US Fed

U.S. equity markets fell Tuesday as geopolitical tensions intensified amid rising concerns over potential U.S. involvement in the Israel-Iran conflict. President Trump’s early departure from the G7 summit to address the crisis fueled concerns about possible escalation. Flight-to-safety flows drove U.S. bond yields lower and the dollar index higher, reflecting investor anxiety over the geopolitical situation. Speaking from the G7 summit in Canada, Trump criticised ongoing trade negotiations with Japan and the EU while signalling imminent pharmaceutical tariffs.

Wall Street’s weakness followed the release of disappointing retail sales data from the U.S. Department of Commerce. U.S. retail sales fell 0.9 per cent in May, significantly worse than the expected 0.6 per cent decline and following a revised 0.1 per cent drop in April. Economists had anticipated the decline based on the initially reported 0.1 per cent uptick for April, making the actual data particularly concerning. Despite this retail weakness, the University of Michigan’s consumer sentiment survey offered a contrasting signal, showing improvement for the first time in six months since June, even amid ongoing trade uncertainty.

The Bank of Japan maintained its benchmark interest rate at 0.5% on Tuesday through a unanimous vote, meeting widespread market expectations. However, the central bank signalled a more cautious approach to monetary tightening by announcing it will slow the pace of its bond purchase reductions starting in fiscal 2026. Under the revised plan, the BOJ will cut its monthly bond purchases by 200 billion yen per quarter, starting in April 2026, which is half the current quarterly reduction pace of 400 billion yen. This extended timeline means the central bank will reach its target of 2 trillion yen in monthly purchases by March 2027, rather than the previo usly planned 3 trillion yen by March 2026.

The measured approach reflects the BOJ’s effort to balance two competing priorities: continuing its gradual exit from ultra-loose monetary policy while providing sufficient economic support as Japan faces headwinds from steep U.S. trade tariffs.

The Fed is expected to hold rates steady at Wednesday’s FOMC meeting while maintaining a cautious stance on future cuts. Key focus areas include how tariffs may influence rate decisions and updated economic projections.

Asian markets opened lower, following declines in the U.S., as tensions between Israel and Iran continue to weigh on global investor sentiment. Indian Rupee weakened 17 paise against the US dollar, reaching its lowest close since April 11, 2025. Geopolitical uncertainties primarily drove this depreciation, as prevailing risk-off sentiments and rising crude oil prices collectively pressured the local currency.

Nifty failed in its attempt to breach the crucial resistance level of 25,000, concluding yesterday’s session on a weak note. Nifty is in a consolidation phase, and traders should keep a close eye on 24,700, which now serves as a key support level on the downside. The Fed announcement will dominate market attention alongside housing starts and jobless claims data when U.S. markets open tonight. Indian markets are likely to open subdued following weak cues from Asia and the U.S., though buying support is expected at lower levels.

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Source: HDFC Securities Prime Research