Fed will maintain the gradual path

15 May, 2018

Markets have begun to believe that the Federal Reserve will maintain the gradual path of interest rate hikes this year, after a modest reading of US consumer price indices announced last Thursday.  But at the same time the geopolitical picture is still dominating the scene in general, especially after Washington announced its withdrawal from the nuclear agreement with Iran and markets waiting for a NAFTA settlement.

The strong dollar retreated after three straight weeks of uptrend

The US dollar index closed lower for the first week after three consecutive weeks of gains. This decline started last Thursday and after the release of the US consumer price index – which came below expectations – especially with the sign that the improvement in the basic reading is due to the recent highs in energy prices. We are therefore likely to see stability in its core CPI, which excludes volatile commodities such as energy prices.

On the other hand, in line with the continuation of the policy of waiting and monitoring by other major central banks, the BoE held interest rates unchanged on Wednesday, and mentioning in an additional reference to markets that the high inflation rates since 2017 are the result of the fall in the British pound. British monetary policymakers are trying to reduce the market's ambition to rush to raise interest rates at least in the first half of this year.

Will US sanctions on Iran absorb the surplus oil supply?

After the US president announced his country's withdrawal from the Iranian nuclear agreement and after the announcement of the return of the imposition of a wide range of sanctions by Washington on Iran, statements from the US Treasury Secretary followed on the reduction of Iranian oil exports after 180 days, attracting the attention of oil traders.  According to OPEC's monthly report released on May 14th, 2018, the gap between supply and demand for crude oil may stand at an excess of 300,000 bpd, while Iran produces about 3.8 million barrels per day.  Thus, if Washington succeeds in implementing these sanctions, that will likely aid in narrowing that gap.

It remains to be seen how the US administration proceeds, as according to President Trump himself, he doesn’t want to see a rise in oil prices.  Therefore, it is likely they will call on some OPEC countries – especially Saudi Arabia – to compensate for any shortage of oil supplies after the implementation of these sanctions. Furthermore, US domestic production has been rising according to Baker Hughes oil rig count report, and hence the increase in US production may help in reducing or eliminating the gap caused by sanctions on Iran.  But the impact on the rise in prices in the medium term may appear small due to the factors that have already been mentioned