- The Saudi Arabian export stop is a worry for the oil market.
- Rising Brent prices are increasing the chances of Fed rate hikes, supporting the USD.
The US dollar has reached weekly highs, driven by rising demand for safe-haven assets and higher yields on US Treasury bonds. Investors are demanding a higher risk premium amid the conflict in the Middle East. Brent’s rally towards $91 per barrel is increasing the risk of accelerating inflation and pushing the Fed towards tighter monetary policy.
One factor holding back the oil rally was the possibility that Saudi Arabia could find a workaround through the Red Sea. Threats by the Yemeni Houthis to block the Bab el-Mandeb Strait have heightened fears that Brent could rise further. Goldman Sachs sees the price reaching $120 per barrel if the conflict in the Middle East drags on, although it does not consider this scenario the base case.
According to Rystad Energy’s estimates, 2.5 million BPD of Saudi Arabia’s exports are at risk, pushing prices higher. Morgan Stanley warns that there is no room for error, as global oil stocks, excluding China, are at record lows.
The situation continues to escalate. Meanwhile, rumours from Reuters that mediators have conveyed a proposal to Iran for a 10-day ceasefire, aimed at returning to the terms of the deal concluded in June, have provided a breath of fresh air for financial markets. Hopes for de-escalation in the Middle East have led to a retreat in the US dollar. However, the gulf between the opposing sides is so wide that there is little hope of lasting peace in the region.
Higher oil prices are increasing the risk of a resurgence in US inflation and may force the Fed to tighten monetary policy. Bank of America forecasts three hikes later this year, in September, October and December. A 50-basis-point rise in the federal funds rate is already partly priced into financial markets. More aggressive measures are required for the Fed to bring inflation back to its 2% target.
Against this backdrop, the medium-term outlook for EURUSD appears bearish, although the ECB meeting may offer short-term support for the euro. A rise in the deposit rate is not expected, but Christine Lagarde may adopt more hawkish rhetoric.
The FxPro Analyst Team