Trump threatens Iran’s power plants, Iran pledges to retaliate
Dollar rebounds as oil rallies and reignites inflation concerns
Gold extends collapse, yen returns to intervention zone ahead of CPI data
Wall Street stays under pressure as Iran war rages on
Dollar rebounds on US-Iran hostile rhetoric
The US dollar stabilized on Friday but sealed its first weekly decline since the start of the war in the Middle East. Fears about surging oil prices fueling inflation around the world prompted major central banks to turn hawkish. Although the Fed appeared more hawkish too, last week’s monetary policy decisions have put the Fed in the position of the only major central bank that is not expected to hike interest rates this year.
Nonetheless, the greenback is staging a comeback today on a new spree of safe-haven inflows as the US and Iran escalated their threats over the weekend. On Saturday, US President Trump said that the US would hit Iran’s power plants, if the country does not reopen the Strait of Hormuz in 48 hours. Iran responded by threatening to strike key energy and water infrastructure of the US’s allies in the Gulf.
This threatens the lives of millions of people who rely on desalination plants for water and suggests that the war could drag on for many more weeks, especially with Israel saying that they have already planned for weeks of more fighting.
Oil prices opened with a positive gap, with WTI crude oil returning above the $100 mark and it could continue climbing higher as long as the war continues to rage and the Strait of Hormuz remains closed. The concerns about the impact of this energy crisis to inflation have prompted investors to pencil in only 15bps worth of rate cuts by the Fed this year.
Gold plummets as rate-cut hopes diminish
Gold continued its free fall today, tumbling as much as 8% amid increasing inflation fears and signs that rate cuts are now off the table. However, the slide of gold is disproportional to the rebound of the US dollar, which means that it was affected not only by the pushback in Fed rate cut bets, but by the emergence of rate hike speculation regarding other major central banks.
What’s more, even those who trusted that the precious metal could start acting as a safe haven at some point amid this geopolitical turmoil may have decided to liquidate their positions, stirring up a momentum slide.
Gold fell to around $4,100 before rebounding somewhat to trade slightly above the 200-day exponential moving average (EMA) again. Another round of escalation in the Middle East could send the metal lower, with the bears perhaps aiming for the round figure of $4,000.
Yen in intervention danger zone ahead of CPI data
After pulling back on the BoJ’s hawkish message, dollar/yen rebounded and it is now trading above $159.00, increasing once again the risk of intervention by Japanese authorities. Tonight, during the Asian session on Tuesday, Japan’s National CPI data for February are due to be released.
In January, both the headline and core CPI rates slipped to 1.5% y/y and 2.0% y/y from 2.1% and 2.4%, respectively, suggesting that the upside risks to inflation stemming from the tumbling yen had yet to materialize.
A further slowdown in February could somewhat weigh on the sense of urgency for a BoJ hike in April and thereby allow further yen selling. However, this could trigger actual intervention from the finance ministry as minister Katayama has been very vocal about it lately.
On the other hand, accelerating price pressures could corroborate the BoJ’s view and perhaps push the yen instantly higher. In any case, it seems that the risks surrounding the yen may be tilted to the upside, especially with the dollar/yen pair hovering near the 160.00 zone.
Stocks feel the heat of the war in the Middle East
On Wall Street, all three main indices closed in the red, with the tech-heavy Nasdaq losing the most, while stock futures are suggesting an even lower opening today. The risk-aversion amid the uncertainty surrounding the war in the Middle East, combined with the overly hawkish repricing of implied interest rate paths across major economies, constitute a negative cocktail for equities.
The S&P 500 is already nearly 10% off its record highs and well below its 200-day EMA, suggesting that should the hostilities in the Middle East drag on, there is momentum and scope for further declines. The next critical support zone for the index may be at around 6,360, a level that stopped the price from moving lower back in August and September.