- The fighting in the Middle East caused the closure of a key Saudi Arabian oil pipeline.
- Oil prices went back above $100, increasing inflation worries.
- Market participants are pricing an 86% chance of a Fed rate hike this week.
Currency futures were down on Monday as the dollar strengthened ahead of the FOMC policy meeting. Recent economic data and developments in the Middle East have boosted bets on a Fed rate hike on Wednesday. Market participants are also gearing up for policy decisions by the Bank of Japan and the Bank of England.
The dollar ended last week nearly flat after swinging amid geopolitical tensions and economic data. Tensions in the Middle East escalated, causing supply concerns that sent oil prices soaring. The US and Iran attacked several oil tankers while the Houthis hit energy facilities in Saudi Arabia.
The fighting caused the closure of a key Saudi Arabian oil pipeline, further clouding the outlook for supply. Oil prices went back above $100, increasing inflation worries. The rising fuel prices have put most major central banks on high alert, with traders expecting rate hikes across the globe.
Dollar bullish bets (Source: CFTC, Bloomberg)
Consequently, the dollar lost its edge against its peers as most other central banks have assumed a hawkish stance. Nevertheless, expectations for a Fed rate hike increased. Moreover, data during the week revealed that inflation accelerated in August as expected. Meanwhile, the annual figure came in at 3.4%, holding from the previous month.
The data, along with the rally in oil, pushed up the likelihood of a September rate hike to 86%, boosting the dollar in the new week.
“The Fed could decide to wait, but that is complicated by its October meeting being just ahead of the US midterm elections, and waiting until December to move will be too long,” said Shane Oliver, chief economist and head of investment strategy at AMP.
Market participants also paid attention to the ECB policy meeting last week. Policymakers voted to increase borrowing costs by 25 basis points. The euro gained ahead of the meeting but fell soon after. Although Lagarde noted inflation was a problem, she failed to give forward guidance.
The Bank of England is set to meet this week, and traders expect a pause. Meanwhile, the yen could climb further as the Bank of Japan prepares to hike rates on Friday. Traders will focus on the messaging during the meeting for clues on future moves.
