The latest US attack on Iran is not just a geopolitical shake-up, it has also sparked fresh speculation about the direction of the Federal Reserve's interest rate.
Oil Rises, Bonds Fall
Brent crude jumped 4.3% to USD79.25 a barrel, as conflicting claims about the status of the Strait of Hormuz sparked speculation of a global oil supply disruption.
US government bonds were also affected, with the yield on interest-sensitive two-year bonds rising to their highest level since February 2025. The US dollar, a "safe haven" option as the Middle East conflict rages, continued to strengthen against almost all major currencies.
Gold and silver also fell, with gold down 1.6% to around USD4,055 an ounce, while silver fell almost 3% to USD58.20 an ounce. Bitcoin also took a hit, falling more than 2% to around USD62,700, leading a broader decline in the crypto market.
Why the Fed is the Main Focus Now
The soaring oil price is not just a supply issue, it has a bigger impact on inflation expectations. When energy costs rise, inflation risks also increase, and this is what has made market traders start placing higher bets that the Fed will raise interest rates.
So far, investors are expecting almost 40 basis points of Fed interest rate hikes by December, much higher than just 15 basis points in early June. This week will be a key determinant, as US inflation data and Fed Chairman Kevin Warsh's congressional testimony will be closely scrutinized by the market.
Warsh himself has said that price risks have subsided in recent weeks, and reiterated his commitment to bringing inflation back to the US central bank's 2% target. But many analysts are waiting to see if Warsh's tone changes after the increasingly heated Iran headlines.
The impact on the Strait of Hormuz & Our Ringgit
Tensions in the Strait of Hormuz are the main cause of market confusion right now. Iran claims the strait is closed, but the US military and maritime authorities say shipping can still pass through the southern route.
This confusion alone is enough to keep oil prices volatile, even though there is no full blockade in place. If oil prices remain high for a long time, our country's energy import costs will also be affected, and this could indirectly put pressure on the Ringgit.
The dollar's strengthening due to expectations of a Fed interest rate hike has also put additional pressure on regional currencies, including the Ringgit, as a strong dollar usually makes other currencies look relatively weak.
Key Takeaways
Brent oil jumped 4.3% to USD79.25 a barrel on uncertainty over the status of the Strait of Hormuz after the US's latest attack on Iran.
US government bonds fell, with the two-year bond yield hitting its highest level since February 2025.
Traders now expect the Fed to raise interest rates by up to 40 basis points by December, up sharply from 15 basis points in early June.
Gold, silver and Bitcoin also fell in tandem, a sign of overall market sentiment being weak.
A strong dollar and the risk of high energy costs could put additional pressure on the Ringgit in the near term.
This week will be a key test for the market, as inflation data and Warsh's testimony could potentially determine whether this rate hike is just speculation or will become a reality.
