Written by Trump wants to reopen the Strait of Hormuz
The US dollar continued flexing its muscles on Friday, outperforming all its major counterparts and locking a solid two-week winning streak as the war in the Middle East shows no signs of easing.
US President Trump said that they are “totally destroying” Iran’s military and economy, adding that they will hit even harder this week, with Tehran strengthening its pledge to keep the Strait of Hormuz closed, thereby prolonging the disruption in oil supply and subsequently a global energy crisis.
However, the US dollar is stabilizing today, perhaps due to some profit-taking or dim hopes that the Strait of Hormuz could reopen after Trump said on Sunday that he is demanding ally countries to help him protect and reopen the strait.
That said, oil traders remained hard to convince. Oil prices opened the new week with a positive gap, and although they pulled back during the early Asian session, they are back in recovery mode again, which means that inflation fears remain well entrenched and that the US dollar could very well resume its rally.
Will the Fed agree with investors’ rate-path repricing?
The energy crisis and the resulting inflation concerns have prompted investors to readjust their implied rate paths for major central banks, scaling back their rate cut bets and even starting to pencil in rate hikes for the banks expected to remain on hold throughout the year, like the ECB.
Regarding the Fed, investors are now anticipating only one quarter-point reduction by December, while the basis points worth of cuts rise to only 29 by June 2027. With that in mind, Wednesday’s decision may attract special attention as investors may be eager to see whether Fed officials agree with the market’s hawkish adjustment.
Back in December, the dot plot pointed to only one quarter-point rate cut this year, but the market went as far as penciling in three reductions in early February. Thus, although market participants proceeded with an overly hawkish repricing, they are now in agreement with the latest dot plot. Therefore, for the US dollar to extend its rally, Fed officials may need to appear worried about the latest developments in the Middle East and the updated dot plot to point to no rate cuts this year.
RBA expected to hike; will it appear even more hawkish?
Nonetheless, it is not only the Fed that will decide on monetary policy this week. Almost all major central banks are on the agenda. The ball gets rolling during the Asian session on Tuesday with the Reserve Bank of Australia, followed on Wednesday by the Bank of Canada, ahead of the Fed. On Thursday, the Bank of Japan, the Bank of England, the Swiss National Bank, and the European Central Bank will follow.
Since the war in the Middle East erupted, the energy crisis has only intensified the upside risks to Australian inflation, which is already hovering above the upper bound of the RBA’s target range of 2-3%. With that in mind, investors are assigning a 75% of a rate hike tonight, which means that for the aussie to rebound, policymakers may need to not only raise interest rates, but signal that more increases are on the way. Still, the deterioration in risk appetite may further slow down the uptrend in aussie/dollar. The aussie may benefit more against currencies like the euro.
Although investors are pricing in around 45bps worth of rate hikes by the ECB this year, traders prefer to sell the common currency on concerns about the negative impact of the war to Eurozone economic activity. Also, it is very unlikely that Lagarde and her colleagues will corroborate the idea of two rate hikes so soon.
Gold stays under pressure even as stocks rebound
On Wall Street, all three of its main indices closed in the red on Friday, with the Nasdaq losing the most, nearly 1%. Today, though, stock futures are pointing to a decent rebound, while European equities opened positive.
Perhaps this was due to US President Trump’s comments to intensify efforts to reopen the Strait of Hormuz, which could ease anxiety about supply, and/or due to positioning ahead of a streak of major central bank decisions. Maybe some investors do not expect policymakers to satisfy the overly hawkish repricing in implied rate paths amid the surge in energy prices.
Gold, on the other hand, is failing to paint a similar picture. It tumbled on Friday due to intensifying dollar buying, but it is not rebounding today on – albeit timid – hopes of an oil supply restoration. One possible explanation is that any prospect of reopening the Strait of Hormuz may be prompting those still treating gold as a safe haven to accept their losses and close their positions.
by XM.com
