AWARDS
Next Friday marks the ninetieth day of the US-Iran war. So far, oil prices have been held down by: (1) excess crude already loaded onto tankers and outside the Strait of Hormuz; (2) US authorization to purchase Russian oil; (3) some reduction in demand due to importer restrictions; and (4) increased US energy production. But we're reaching the point where (1) and (2) are running out, (3) is hurting growth, and (4) could be permanently erased by President Donald Trump restricting US refined crude exports ahead of the US summer car travel season.
Investor confidence in a near-term US-Iran agreement remains shaky. While Trump claims the United States is in the final stages of negotiations with Iran to end the war, he continues to threaten a return to even more massive attacks than the first wave to pressure Iran into reaching an agreement. The coming days approach the unclear deadline for Iran to reach an agreement and the end of Trump's postponement of the second wave of attacks.
Investors cannot ignore interest rates, however, as the impact of rising oil prices continues to impact economic data. This week, PMI data showed a negative impact on growth, while next week, the positive impact on inflation will be seen with the release of US core PCE data and eurozone CPI data. Kevin Warsh will replace Jerome Powell as the FOMC chair. While no remarks are expected from the new chair, we will hear from several other FOMC members. Many members of the ECB Supervisory Board will also be present on the recordings.
Positive surprises on US inflation and the FOMC's dovish rhetoric have forced investors to revise their dovish outlook on the Fed. This, combined with the continued resilience of the US economy, could mean the Fed's current interest rate pause will last much longer, despite the FOMC's change in leadership. Consequently, US rates—the other key component of the "dollar smile," along with market risk sentiment—could remain a key determinant of the currency market, boosting the dollar in the near term.
Inflation data is due to be released in Australia. The RBNZ will keep rates unchanged but will continue to signal its willingness to raise them. This week, we initiated a short position on AUD/NZD.
