- Tehran said it had closed the Strait of Hormuz.
- Market participants are pricing a higher 52.1% chance of two or more Fed hikes this year.
- The US will release its crucial CPI report this week.
Currency futures were subdued on Monday as the dollar rebounded amid an increase in Fed rate hike expectations. Tensions in the Middle East escalated further over the weekend, leading to the closure of the Strait of Hormuz. As a result, oil prices jumped, fueling inflation worries. Meanwhile, market participants are cautiously awaiting the US CPI report due on Tuesday.
Dollar and oil (Source: Bloomberg)
The conflict in the Middle East raged last week after tankers were hit near the Strait of Hormuz. The US retaliated by striking several targets in Iran. The exchange of fire caused panic and uncertainty about the ceasefire deal signed recently. At the same time, it put a pause on negotiations between the two countries. Oil prices rose, sending the dollar higher against most of its peers. High oil prices will keep the Fed’s hawkish outlook in place.
However, calm returned after reports revealed that Iran had reached out to the US for peace. Still, Trump said the ceasefire deal between them was over. This was a sudden shift from the previous weeks when market participants were hoping for a longer-lasting deal to end the war. The two nations had held talks on several occasions, leading to the reopening of the Strait of Hormuz. At the same time, the US lifted sanctions on Iranian oil and ended its blockade on its ports.
The renewed tensions are threatening to undo all this, putting the global economy back where it was at the height of the war. The tensions got worse on Friday and over the weekend, with news outlets reporting an exchange of fire between the US and Iran. Tehran said it had closed the Strait of Hormuz.
Oil rose again and market participants were pricing a higher 52.1% chance of two or more Fed hikes this year.
“After the flare-up into the end of last week, which continued over the weekend, the dollar has responded, and the crude oil price has been the driver,” said Tony Sycamore, market analyst at IG in Sydney. “This reinflames concerns that if the energy prices rise from here, we could start to see rate hikes pulled forward.”
Furthermore, the US will release its crucial CPI report this week. An upbeat report will boost rate hike bets and the dollar. Meanwhile, currency futures will suffer. The reverse is also true.
