The Strait of Hormuz has once again become a source of turmoil in world markets. This time, it is not just ordinary tensions, but Trump's actual actions that have caused oil prices to soar to their highest levels since May 2020.
Tonight Will Be a Key Determinant
US Consumer Price Index (CPI) data will be released tonight, and the figure is expected to fall to 3.8% compared to 4.2% the previous month. Fed Chair Kevin Warsh will also make his first appearance before Congress since leading the central bank.
These two events are expected to be major determinants of the direction of the Fed's interest rates in the coming months, especially when oil prices are soaring like they are now.
Oil Soars Drastically, Here's Why
Brent rose 1.6% to around USD84.65 a barrel today, following a crazy 9.6% jump the day before. The main reason is that Trump has re-announced the blockade of Iranian ships through the Strait of Hormuz, and even demanded a 20% refund for all other cargo passing through the route.
Such drastic action has made the hope of normalizing traffic in the Strait of Hormuz in the near future increasingly slim. The energy sector is once again the main focus, because the status of this strait determines the direction of prices in the global market now.
Many analysts now feel that the situation has the potential to get worse before it subsides.
Bonds Fall, Fed Takes a Firm Stance
US government bonds fell across the curve after traders increased their bets that the Fed will raise interest rates, in line with the surge in oil prices. Money markets are now placing a probability of around 50% that the Fed will raise interest rates this July.
Fed Governor Christopher Waller himself confirmed that the authorities may need to raise interest rates to control price pressures. He said that if the core inflation reading is still hot this week, the Federal Open Market Committee (FOMC) will have to consider tightening monetary policy in the near term.
The Impact on Our Dollar, Gold & Ringgit
Gold and silver fell, while the US Dollar surged to its highest since June 23. This pattern is common when expectations of interest rate hikes meet geopolitical tensions, making the Dollar more attractive than non-interest-bearing assets like gold.
For the Ringgit, the combination of high oil prices and a strong Dollar is actually putting pressure from two directions at once. The country's energy import costs have increased due to oil prices, while a strong Dollar has made regional currencies, including the Ringgit, relatively weaker.
This week is expected to be one of the most decisive weeks for the market, with the corporate earnings season starting simultaneously with inflation data and Warsh's testimony.
Key Takeaways
US Consumer Price Index data is due tonight, expected to fall to 3.8%, while Kevin Warsh makes his first appearance in Congress as Fed Chair.
Brent oil prices jumped 9.6% in a single day, the highest since May 2020, following the US reimposition of sanctions on Iranian vessels in the Strait of Hormuz.
Money markets are now pricing in a 50% chance of the Fed raising interest rates in July, following a dovish statement from Fed Governor Christopher Waller.
US government bonds fell while the dollar surged to its highest since June 23, reflecting the market's risk-off sentiment.
High oil prices and a strong dollar have the potential to put double pressure on the Ringgit through energy costs and exchange rates.
This week will be a real test for the market, as a combination of inflation data, Warsh's testimony, and Hormuz tensions could all change course at the same time.
