ATFX: Oil Prices Push Up Inflation, Fed May Even Raise Rates

Feature: ATFX Forex Column Submission

On March 12, ATFX: In May of this year, Federal Reserve Board Member Kevin Warsh will succeed Jerome Powell as Federal Reserve Chair. The market consensus expects Warsh to follow Trump’s wishes and cut interest rates significantly. However, after the outbreak of the US-Iran conflict, this logic has changed, especially after Iran’s blockade of the Strait of Hormuz caused international oil prices to surge past $100.

U.S. Energy Secretary Chris Wight announced Wednesday evening that the U.S. will release 172 million barrels of oil from strategic reserves to help reduce energy costs during the Iran conflict. The International Energy Agency agreed Wednesday to release 400 million barrels of oil to address supply disruptions caused by the Iran conflict, the largest such action in the organization’s history.

Despite high oil prices, both the U.S. and IEA have released massive amounts of oil reserves, but this has not alleviated market concerns. U.S. crude oil WTI surged 7% overnight, reaching a high of $94, just one step away from the $100 mark. It is clear that merely releasing strategic oil reserves, rather than stopping the US-Iran conflict, cannot effectively ease market fears of supply disruptions.

In February, the U.S. core CPI annual rate was 2.5%, and the nominal CPI annual rate was 2.4%, both unchanged from previous and expected values, indicating that U.S. inflation in February was not affected by international oil prices. However, March’s inflation level is likely impacted by rising international oil prices. If the March CPI annual rate exceeds previous figures significantly, for example surpassing the 3% warning line, the Federal Reserve may be forced to raise interest rates to curb inflation.

Contradictorily, the U.S. February non-farm employment report was very poor, with a decline of 92,000 jobs, indicating that Trump’s series of aggressive domestic policies are severely impacting the U.S. labor market. Rate hikes could worsen employment conditions, which is a key reason Trump strongly advocates for the Fed to cut rates. However, the Fed’s primary goal has always been price stability. When faced with a dilemma of high inflation and high unemployment, the Fed is more likely to choose to raise rates to control inflation.

▲ATFX Chart

In terms of market trend, on the daily chart, the US dollar index is within an upward channel, with no clear top formation. The upward trend within the channel is likely to continue. The medium-term low is at 95.49, the medium-term high at 99.47, and the current peak of the upward wave is at 99.67, breaking the medium-term high. The market will look for a new medium-term high.

The ongoing surge in international oil prices has indirectly supported the US dollar index, as high oil prices often lead the Fed to raise interest rates to curb potential inflation. Similarly, if international oil prices sharply decline due to easing US-Iran tensions, the dollar index is likely to weaken.

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Editor: Chen Ping