Geopolitical tensions in the Middle East flared after CNN reported that U.S. intelligence believes Israel is preparing for a potential strike on Iranian nuclear facilities. The report, based on unnamed American officials familiar with recent intelligence, suggests that Israel’s military planning is well underway — though any action may hinge on the outcome of ongoing nuclear negotiations between Washington and Tehran. While the report is heavily caveated, the underlying message from U.S. sources is clear: a strike is a live possibility. Energy markets reacted swiftly, sending crude prices surging higher. They’ve since had some retracement.

In politics we had a unanimous 100–0 vote in the US Senate to pass the No Tax on Tips Act, effectively making all tips tax-free. While the measure is being framed as a win for service workers, some analysts warn of unintended consequences. With tips now exempt from taxation, there’s concern that efforts by workers and unions to push for higher base wages may lose momentum, as employers shift more compensation into variable, tip-based income. And since tips were already lightly taxed or often underreported, the net impact could ironically result in lower after-tax income for many low-wage workers.

Staying in Washington, Politico reports a tentative agreement has been reached to raise the cap on state and local tax (SALT) deductions to $40,000 as part of the broader GOP tax package. According to three Republican lawmakers familiar with the closed-door talks, the deal marks progress toward finalising the megabill, though some internal objections remain and further negotiations are expected. While not yet final, the proposed increase would represent a significant concession aimed at winning broader support for the legislation.

We had comments from three Fed officials. Cleveland Fed President Beth Hammack, San Francisco Fed President Mary Daly, and Atlanta Fed President Raphael Bostic. All three signalled caution, Hammack summing it up by saying the best course of action for the Federal Reserve right now is to "sit on our hands" and closely monitor incoming data. Bostic added that on issues like trade policy, clarity appears to be "moving further into the future."

From Japan we had a trade data for April showing a surprise deficit. Exports to US fell in April for first time in four months.

Also in Japan, 30-year and 40-year JGB yields have remained at or close to record highs.

China’s Ministry of Commerce (MOFCOM) strongly criticised recent US guidance warning companies against using advanced Chinese semiconductors, including Huawei’s Ascend AI chips. In a statement, a MOFCOM spokesperson described the move as a “typical example of unilateral bullying and protectionism,” accusing Washington of imposing discriminatory restrictions on Chinese firms.

I’ve noted the big mover, oil, above. But FX was not quiet. The upshot of all the developments is a lower US dollar on the session here. All major FX is higher against the friendless dollar. EUR/USD is up a solid 50 points while USD/JPY and USD/CHF are down similar. GBP, AUD, CAD, NZD all higher also.

Gold has been lacklustre but is near its session high as I update.

oil srap israel iran nuclear 21 May 2025
Source: Forex Live