Brent oil prices recovered some of the previous session's losses as hostilities in the Middle East continued to escalate and shipping traffic in the Strait of Hormuz declined. The commodity traded just below USD85 a barrel.
Bonds Fall, Dollar Sees Modest Gains
Government bonds in Australia and New Zealand fell slightly, while US Treasuries held steady. Rising geopolitical tensions helped curb investors' risk appetite and pushed oil prices higher this week, fueling concerns of inflationary pressures that could prompt the Federal Reserve to raise interest rates before the end of the year.
Treasury yields rose slightly on Thursday, while the US dollar saw modest gains.
Fed Officials Worried About Inflationary Pressures
Kansas City Fed President Jeff Schmid stressed that inflation was his biggest concern, given the risk of further acceleration in the coming months. His Dallas counterpart, Lorie Logan, has called for a rate hike, saying inflation shows no sign of returning sustainably to target.
Economic Data Paints a Mixed Picture
Traders are also looking at a number of key economic reports. Jobless claims fell last week, while retail sales rose modestly in June, although pressured by lower gas station revenues that masked a stronger gain by some other traders.
Impact on Markets & Ringgit
The combination of ongoing geopolitical tensions and signs of inflation that have Fed officials concerned could keep pressure on the Ringgit in the near term. As long as oil prices remain high due to disruptions in the Strait of Hormuz, the country's energy import costs are also at risk of rising.
Dovish statements from Fed officials such as Schmid and Logan have also supported expectations of higher interest rates, which typically strengthen the US Dollar against regional currencies. This means that until there is more clarity on the direction of the Fed's monetary policy, risk-off sentiment could continue to weigh on regional forex markets.
Key Takeaways
Brent oil prices recovered slightly below USD85 per barrel on escalating tensions in the Middle East and reduced traffic in the Strait of Hormuz.
The Kansas City and Dallas Fed presidents both voiced concerns about inflation, with Logan openly calling for a rate hike.
The US dollar posted modest gains while bond yields rose, reflecting market risk-off sentiment.
Unemployment claims fell and retail sales rose modestly in June, despite pressure from lower gas station revenues.
Geopolitical tensions and ongoing inflation risks could add pressure on the Ringgit through energy costs and a stronger Dollar.
As long as tensions in the Strait of Hormuz remain volatile and Fed officials continue to voice inflation concerns, the market is expected to remain cautious in assessing the direction of interest rates before the end of the year.
