Ebb Tide
For the first time in three years the ECB is raising rates, the Fed’s dot plot has turned from cutting to hiking, and gold fell below 4,000 dollars. The liquidity wave is pulling back. And when the water goes out, you see who was swimming without trunks.
🔴 Signal of the week
The central banks turn from cutting to hiking. This is not news, it is a break in the mechanism. On June 11 the ECB raised its deposit rate to 2.25 percent, the first time since 2023, after eurozone inflation jumped to 3.2 percent. Six days later the Fed, under its new chair Kevin Warsh, published a dot plot in which the median shifted toward a hike, 3.8 percent by year end, though in March a cut was still projected.
Why does it matter? Not because the economy is strong, as it would be at the top of a healthy cycle. Central banks are tightening not because the economy is overheating, but because the Iranian war lifted oil and revived inflation at exactly the moment a hard hawk took the wheel at the Fed. This is a supply shock meeting the fear of monetary policy. The classic stagflation trap: raising rates into a slowing economy.
Michael Howell says it plainly: the peak of the liquidity cycle is already behind us. Oil, the bond volatility index (MOVE) and a rising dollar together cut about a fifth of global liquidity. The everything bubble, in his words, is finished. And the artificial intelligence boom, which alone held risk assets high, was born out of the same liquidity that is now receding. Gold’s fall below 4,000 is not the end of the story, it is the pressure of real rates and the dollar over a short stretch. But it shows the direction: the water is going out.
📸 Market snapshot
🔵 Central bank pulse
The Fed: Warsh debuts with hawk’s teeth
On June 17 the Fed left rates in the 3.50 to 3.75 percent range on a unanimous 12 to 0 vote. But the decision is not the point, the dot plot is. The median moved from a cut to a hike: 3.8 percent by year end against 3.4 in March. Of the 18 members, five would raise by another 50 basis points, one even by 75, and only one still sees a cut. It is the largest hawkish turn of the cycle. An interesting detail: Warsh did not add his own dot to the chart, though he urged colleagues to do so. The new chair does not yet want to be tied to a number.
The ECB: the first hike since 2023
The ECB raised all three of its main rates by 25 basis points, taking the deposit rate from 2.00 to 2.25 percent. It is a sharp turn after eight consecutive cuts from June 2024 to June 2025. There is one reason: May inflation at 3.2 percent, the highest since September 2023, stoked by the Middle East war and energy prices. Lagarde rejected the label of an insurance hike and stressed that the decision is robust across various scenarios. Translation: if we have to, we will raise again.
What it means
The world’s two largest central banks are turning in the same direction together, and it is not the direction buyers of risk assets expected. This is not the cutting cycle everyone priced, it is tightening because of supply inflation. The difference is fundamental: when banks tighten into a weak economy, they are not pumping liquidity, they are draining it. Lyn Alden calls it gradual printing, balance sheet expansion in line with nominal GDP, 220 to 375 billion dollars for 2026. That is nowhere near crisis quantitative easing. For now the pond is being filled by the drop and evaporating by the bucket.
🟠 Geopolitical panorama
🛢️ Middle East / Energy
The war ended as fast as it began. After the June 10 US strikes on Iran and Tehran’s threats to close the Strait of Hormuz, on June 17 Trump and Iranian president Pezeshkian signed a memorandum of understanding over dinner with Macron at Versailles, following the G7 summit. A 60 day truce was agreed to negotiate a final deal. On June 18 Hormuz reopened, and on June 20 Trump promised no fees for passage. Oil, which had jumped during the war, came back below 73 dollars. The structural conclusion: the war premium is gone, but the 14 point framework has no enforcement mechanism for the nuclear part. Calm was bought with time, not with peace.
🇺🇦 Ukraine
Nothing good at the front: Russia still holds about 20 percent of Ukrainian territory, having taken nearly 5,000 square kilometres in 2025. The war continues and Ukraine answers with drone strikes on Russian oil infrastructure. But the geography of the money has changed: in 2026 most American weapons arrive indirectly, as purchases from the United States funded by other countries. Europe is taking over the burden. Germany announced an 11.5 billion euro package, the largest of any, Norway about 7 billion, and EU leaders approved a 90 billion euro package for 2026 and 2027 as concessional loans from the common budget. Kyiv puts its defence needs for 2026 at 120 billion dollars. Experts are pessimistic that the war ends this year, but expect serious talks to begin. The numbers are clear: America is stepping back, Europe is paying, and the front is holding on a European ventilator.
🇨🇳 China / United States
After February’s Supreme Court ruling that struck down part of Trump’s 2025 tariffs, Washington is recalibrating. On June 2 trade representatives proposed a new 12.5 percent tariff on China over a forced labour investigation under Section 301. Meanwhile the yuan is, on IMF assessment, undervalued by 8.5 percent, while newer estimates mention up to 18 percent. Chinese exporters who lost the US market are turning to developing countries. The quiet trade war continues by other means.
🇷🇺 Russia / sanctions
The EU’s dynamic oil price cap was due to rise automatically from 44.10 to 70 dollars a barrel on July 15 because of the supply tension caused by Iran. Brussels is considering halting that increase so the Middle East price jump does not pump up Moscow’s revenue, and is coordinating a postponement with the G7 until January 2027. Sanctions on oil are being tightened, but the war in the region has tripped them up.
🇪🇺 Europe politically
An unexpected conflict broke out at the European Council on June 18 and 19. Council president Antonio Costa approached Moscow twice, probing whether Brussels could take over the peace talks from Washington. Merz and Macron, backed by the Baltic states, Denmark and the Netherlands, sharply rebuked him: he has no mandate to act as an intermediary. Germany and France are pushing the idea that any negotiations with Russia must run through a European troika of Paris, Berlin and London. Between the lines: Europe is arguing not about whether to negotiate, but about who holds the microphone.
🩵 Lithuania and the Baltics
- A record defence budget is working. For 2026 defence gets 4.79 billion euros, or 5.38 percent of GDP, the second highest in NATO. The commitment: no less than 5 percent of GDP for 2026 to 2030. About 60 percent of the money goes to modernisation to NATO standards.
- BALTOPS 2026. From June 4 to 19 the Baltic Sea hosted one of NATO’s largest naval exercises, led by the US Sixth Fleet, with 15 states. A timely demonstration while Hormuz was pulling attention away and Russia was provoking the eastern flank.
- A new defence architecture. The German and Dutch corps, based in Münster, has been assigned to the defence of Estonia and Latvia. An extra layer on the Alliance’s most exposed flank.
- The Baltic defence line is filling in. Latvia completed a 280 km fence on the Russian border, with more than 1,000 bunkers planned. Lithuania has begun buying military engineering equipment for border depots, with nearly 3,000 bunkers planned. Concrete and barbed wire speak louder than declarations.
- The Baltic states stood against Costa in the Council dispute. Vilnius, Riga and Tallinn backed the Merz and Macron line against Costa’s unilateral approach to Moscow. The Baltics are consistent: no negotiations without a clear mandate and without our voice at the table.
- Linas Kojala points out that the United States is privately telling NATO its commitments, including Article 5 and nuclear deterrence, are not changing, and that troops are not being withdrawn from the eastern flank. At the same time experts warn that Russia is preparing for further aggression, while airspace violations and smuggling balloons over Lithuania have already become routine.
🌡️ Chart thermometer
The decisive question is whether the long end of the bond market confirms the dollar rally. While 10 and 30 year yields lag the 2026 peaks, the DXY breakout stays unconvincing. For gold a realistic cycle low falls between late June and mid-July, with a possible brief dip below 4,000. The gold bull is alive only above 4,400, and below that a path toward 3,400 opens. BTC will likely look for a floor at 60,000, with invalidation of the rally scenario if it returns firmly above 70,000. Watch the PCE inflation data as the next catalyst for Fed rhetoric.
🎙️ What the voices say this week
🟣 Where they disagree
This week the voices split into three clear camps, and the difference is not about price, it is about mechanism.
Camp A · Deflationary bust (Howell, Zeberg, Cowen). Liquidity is receding, the AI bubble is bursting, gold and BTC have further to fall, and a recession is coming. The water is going out and nothing gets saved until something breaks.
Camp B · A reflation pause (Hayes). This is only a breath before the next wave. AI debt will blow up, the government will be forced to print, and that is exactly when BTC runs toward a million. The more painful the fall, the more powerful the answer.
Camp C · A structural gold bull (Gromen, Alden). A short-term fall does not change the arithmetic of the debt. The deficit and the sovereign debt bubble force gold higher, whatever the next quarter looks like.
What settles the argument: whether the liquidity drain turns into a credit event. If something breaks (Hayes and Alden are right), central banks will be forced to print and reflation wins. If the descent is slow and without a break (Zeberg, Cowen), deflation runs the scenario. Watch three things: the 2 to 10 year yield spread, the MOVE index, and whether the Fed starts pumping liquidity through the banking system as Gromen describes. These are thermometers, not opinions.
🟡 Cycle update
- Howell’s liquidity cycle: the peak is behind us. Oil, MOVE and the dollar cut about 20 percent of global liquidity. We are entering the ebbing phase.
- Zeberg’s recession model: a blow-off top and a break. The real economy is deteriorating below the surface, with a deflationary bust ahead.
- The hegemonic cycle: late stage. The hegemon uses its instrument, the dollar and the Fed, to defend the currency and price stability through tight money, at the expense of risk asset prices. Conflicts on the periphery (Iran) send supply shocks, and allies (Europe) are forced to fund their own defence.
- The BTC cycle: Cowen dates the peak to October 2025, with late cycle digestion now and a low around October 2026.
- The debt wall: the sovereign debt bubble (Gromen) plus 1.5 trillion of AI debt (Hayes). Two bubbles, one liquidity drain, and the only question is which cracks first.
👁️ To watch next week
- US PCE inflation. The Fed’s favourite measure. If it runs hot it will reinforce Warsh’s hawkish line and the dollar rises further. If it cools it opens the argument over how real the dot plot is.
- The behaviour of the long end. Whether 10 and 30 year yields start climbing toward the 2026 peaks. That is the only confirmation, or refutation, of the dollar rally.
- The cycle low in gold. Late June to mid-July. Whether 4,000 holds as support, or a path toward 3,400 opens.
- The 60 day clock on the Iranian truce. Without an enforcement mechanism for the nuclear part, the memorandum is fragile. Any crack brings the oil premium back.
- The EU oil price cap decision. Whether Brussels halts the July 15 rise to 70 dollars to keep extra revenue away from Moscow.
- AI and semiconductor stocks. After the falls at Broadcom and Micron, the sector is decisive for risk as a whole. Recovery or further slippage will set the mood for the whole market.
- BTC at 60,000. Whether the February low holds. That is the line between Cowen’s technical bounce and a deeper cycle low.