Attacks near Hormuz raise geopolitical risk and ceasefire concerns
Oil spikes toward $100 on supply fears, lifting inflation expectations
Fed rate cut bets pull back, boosting the US dollar
Stocks gain, Nasdaq hits a record, gold steady but vulnerable
IRGC attacks ships near Strait of Hormuz
The US dollar gained against all but two of its major counterparts on Wednesday, holding strong today as well, as Iran’s Islamic Revolutionary Guards Corps (IRGC) fired on three ships near the Strait of Hormuz. The only currencies against which the greenback failed to record gains are the commodity-linked currencies aussie and kiwi.
Although US President Trump extended the prevailing ceasefire indefinitely, peace talks are yet to resume, with the US continuing to block ships from entering and exiting Iranian ports, and Iran keeping the Strait of Hormuz closed. With all that in mind, yesterday’s attacks heightened anxiety about whether a permanent truce can be achieved, or whether the situation will escalate into a new conflict.
Oil spikes to $100, Fed rate cut bets decline
With hopes about the Strait of Hormuz reopening soon fading, oil prices extended their gains, with WTI crude hitting the psychological barrier of $100, before pulling somewhat back. This added to fears that inflation could prove stickier in the months to come, thereby prompting investors to scale back again their Fed rate cut bets, and bolstering the US dollar.
According to Fed funds futures, the market is now assigning only a 25% chance of a quarter-point reduction, which is a notable decrease from 40% last week. Perhaps Kevin Warsh’s remarks that he had made no promises to US President Trump about cutting interest rates have also weighed on the rate cut probability.
Besides keeping their gaze locked on developments surrounding the Middle East, investors and traders are likely to also monitor today the initial jobless claims for last week and the preliminary PMI figures for April. Anything suggesting that the US economy did not sustain wounds from the war in the Middle East and continues to fare well could further weigh on the likelihood of a rate reduction by the Fed this year, thereby allowing the dollar to climb higher.
Yen keeps flirting with intervention, BoJ largely expected to stand pat
The yen continued suffering against the US dollar, staying above the 159.00 territory, repeatedly flirting with intervention. With rate hike bets fading recently, especially with Governor Ueda showing little willingness to proceed with an imminent increase, expectations are for the BoJ to remain on hold when it meets next week, but to maintain a hawkish tone and signal readiness to act as early as June.
If the Bank fails to convince market participants that a rate hike could be delivered in June, the yen is likely to extend its tumble, with dollar/yen perhaps rising above the psychological figure of 160.00 and probably trigger an actual intervention episode.
Nasdaq climbs to fresh record high, gold awaits fresh catalyst
On Wall Street, all three of the main indices finished Wednesday’s session in the green, with the tech heavy Nasdaq gaining the most and hitting a fresh record high. Earnings strength and support for energy stocks by the rally in oil prices may be the main drivers of equities, despite anxiety about a re-escalation in the Middle East rising.
Bearing that in mind, how stocks will perform in the immediate future may largely depend on earnings performance, but fresh geopolitical tensions and oil prices staying elevated for a prolonged period could leave negative marks on Wall Street, especially if inflation fears return to haunt investors and rate hike bets resurface.
Gold continued to trade quietly, staying slightly above the 100-day exponential moving average (EMA) and the $4,640 level. If the ceasefire in the Middle East collapses and the war resumes, gold could be pressured again by rising Treasury yields and a strong dollar, allowing a technical break below $4,640.