AWARDS
MUFG: The US Dollar
The US dollar lost upward momentum yesterday after the dollar index encountered resistance at 100.00. This followed reports that Iran and Israel had agreed to ease tensions after weekend attacks threatened to derail peace negotiations. Israeli Prime Minister Benjamin Netanyahu stated that Israel would not attack Iran for now, but would respond in the event of a new attack. Iran had previously announced the end of its military operations against Israel. However, it warned that if Israel continued its attacks, including in southern Lebanon, "much more severe and devastating actions than before" would follow. Investor optimism, sparked by the de-escalation of military tensions between Israel and Iran, was further fueled by President Trump's remarks, which stated he expected to declare total victory "very soon" and that "oil prices will collapse." These remarks were made during a telephone rally for South Carolina Republicans. The latest developments have caused oil prices to fall back to recent lows, settling just above $90 a barrel.
Nonetheless, the US dollar continues to draw increased support from the recent dovish recalculation of Fed rate hike expectations. The US interest rate market has begun to price in multiple Fed rate hikes over the next year, aligning market expectations about the Fed's monetary policy outlook with those of other major central banks, such as the ECB, which is expected to begin its own tightening cycle this week. This has led to a reversal of yield spreads in favor of the US dollar over the past two months. The next key test of the Fed's rate hike expectations will be tomorrow's release of the latest US inflation report (CPI) for May. The report is expected to reveal a further increase in headline inflation, exceeding the Fed's target of 4.2% in May, due to the continued impact of rising energy prices. At the same time, core inflation is forecast to approach 3.0% in May. While rising inflation is widely expected in the coming months, it could heighten investor concerns about the Fed's willingness to continue ignoring higher inflation by keeping rates unchanged. The next FOMC meeting, scheduled for June 17, will likely represent a crucial turning point for expectations about the Fed's monetary policy and the US dollar, as it will be the first time that new Fed Chair Kevin Warsh will outline his considerations for how the Fed should respond to the energy price shock. Last week's stronger-than-past-the-post nonfarm payrolls report has made it more likely that the Fed will at least abandon its expansionary monetary policy stance at the June FOMC meeting.
