MUFG’s Lee Hardman notes that the U.S. dollar has weakened as tensions ease in the Middle East and Brent crude falls below $90, easing energy-driven inflation concerns. The correction in energy prices has slightly reduced the market risk of a Fed rate hike in the near future. MUFG still expects the Fed to keep interest rates on hold this week, but does not completely rule out a hike.

The dollar reacts to the revaluation of rates

“In the near term, a lower correction in energy prices will reduce central bank expectations for a rate hike ahead of the latest Fed, BoE and BoJ policy meeting this week.”

“The U.S. interest rate market began to price on Friday, indicating a greater likelihood that the Fed will begin raising interest rates as soon as this week in response to the increased risk of rising inflation from higher energy prices.”

“Friday’s policy meeting predicted increases of almost 10 basis points, but this morning they fell back to around 8 basis points following positive developments in the Middle East over the weekend.”

“We assumed that the Fed would leave interest rates unchanged this week, but the possibility of a rate hike cannot be completely ruled out.”

“If the Fed turns hawkish and raises interest rates this week, the U.S. dollar will start to rise again.”

(This article was created with the assist of an artificial intelligence tool and has been reviewed by an editor. Find out more.)