- Oil prices retreat from week’s highs as world leaders seek to boost supply
- But inflation fears persist; rate hikes become baseline, Fed not seen cutting
- Dollar steadier after tumble, gold and equities pare losses
Fed rate cut hopes vanish
This week’s central bank bonanza ended the only way it could - with a major hawkish pivot, as policymakers sounded the alarm bells over soaring energy prices. Crucially, markets reacted accordingly, assigning around a 50% probability that the European Central Bank, Bank of England and Bank of Japan will hike interest rates as early as their April meetings.
The more hawkish-than-anticipated tone of those central banks even spilled over into Fed funds futures. Investors had initially priced out one 25-basis-point cut for the Fed, but the renewed inflation warnings as well as the extra time to fully digest Powell’s message forced a rethink, with the Fed now seen staying on hold for the remainder of the year.
Dollar out-hawked but gold still struggles
Nevertheless, the US dollar has barely recovered from yesterday’s selloff, with the euro and pound holding onto their gains. Though, against the yen, the greenback has reclaimed the 158.00 level.
For the week, the dollar looks set to snap a two-week winning streak against a basket of currencies, but gold is still on track for its third weekly loss.
The precious metal yesterday came close to slipping below $4,500 but has since rebounded to around the $4,700 region.
Amid the jump in government bond yields and the dollar’s broad rally this month, gold’s near-term prospects remain grim. It’s best chance of a short-term recovery likely rests on another popular commodity – oil.
Energy crunch fears persist
Brent crude – the international benchmark for oil prices – and European gas futures are up 50% and 93.5% respectively so far this month, as the war in the Middle East has sparked a supply shock far greater than either the White House or Israel likely anticipated.
The scale of damage to energy infrastructure in the region risks creating oil and gas shortages for years to come, as neither Iran nor the US and Israel appear ready for an immediate ceasefire. This leaves the prospect of vital energy facilities continuing to be targeted, hence, why the inflation threat is very real.
Some cause for optimism in Middle East
But as the week draws to a close, there is some optimism. US Treasury Secretary Scott Bessent has signalled that Washington is considering lifting sanctions on stranded Iranian oil tankers to help ease the supply constraints. Moreover, with Israel refraining from attacking Iran’s South Pars gas field for now, and renewed efforts by world leaders to re-open the Strait of Hormuz, the rally in oil prices has cooled off.
Brent crude is trading just below $110 a barrel, while WTI is flat around $95.65.
After initially refusing to get involved in the war, the UK, France, Germany, Italy, the Netherlands, Canada and Japan have issued a statement, expressing their readiness to ensure the safe passage of vessels through the Strait of Hormuz. Whilst this signals progress, it may be some time before an effective plan can be put into action and is probably why the impact on oil prices has been limited.
There are also hopes that the US and Israel are close to fulfilling their objectives in Iran, after Prime Minister Netanyahu yesterday told reporters that Tehran no longer has the ability to enrich uranium or to produce ballistic missiles.
Can Wall Street bounce back?
All this is aiding risk sentiment on Friday, spurring a rebound in European equities, although Asian stocks extended their declines. Shares on Wall Street ended Thursday’s session lower despite a late rally that briefly took the S&P 500 to positive territory. Futures are swinging between gains and losses today, suggesting the headlines of the day will likely determine the direction.