Recent developments have altered market expectations for U.S. monetary policy. In May, Federal Reserve Governor Kevin Warsh is set to succeed Powell as Fed Chair. While the prevailing market view was that Warsh would aggressively cut rates in line with the administration's wishes, the outbreak of conflict has shifted this outlook, particularly after Iran's blockade of the Strait of Hormuz pushed international oil prices above $100 per barrel.
In response to soaring energy costs, U.S. Energy Secretary announced plans to release 172 million barrels from the Strategic Petroleum Reserve to help lower costs amid the conflict. Concurrently, the International Energy Agency agreed to a historic release of 400 million barrels to address supply disruptions caused by the war, marking the largest such action in the agency's history.
Despite these substantial releases from the U.S. and IEA, market concerns remain largely unabated. WTI crude surged 7% overnight, reaching a high of $94 per barrel, moving within close range of the psychologically significant $100 mark. This indicates that releasing reserves alone, without de-escalating the underlying conflict, is insufficient to ease fears over potential oil supply disruptions.
U.S. inflation data for February showed the core CPI annual rate at 2.5% and the headline CPI at 2.4%, both matching previous readings and expectations. This suggests that inflation in February had not yet felt the impact of rising oil prices. However, March's inflation figures are highly likely to reflect the surge in international oil prices. Should the March CPI annual rate significantly exceed previous levels—for instance, breaking above the 3% threshold—the Federal Reserve may be compelled to raise interest rates to curb inflation.
This creates a policy dilemma. The February U.S. non-farm payrolls report was notably weak, showing a loss of 92,000 jobs, indicating that recent domestic policies may be adversely affecting the labor market. Raising interest rates could further worsen employment conditions, which is a key reason behind the administration's push for rate cuts. Nevertheless, the Fed's primary mandate has always been price stability. Faced with a choice between combating high inflation and addressing high unemployment, the Fed would most likely opt to hike rates to rein in inflation.
On the technical front, the U.S. dollar index remains within an ascending channel on the daily chart, showing no clear signs of a top formation. The upward trend is likely to continue within the channel. The intermediate-term low is at 95.49, with the intermediate high at 99.47. The recent peak of the current upward leg reached 99.67, breaking above the previous intermediate high and suggesting the index will seek a new higher level.
The ongoing surge in international oil prices is indirectly supporting the U.S. dollar, as higher oil prices often lead to expectations of Fed tightening to counter potential inflation. Conversely, a sharp decline in oil prices due to a de-escalation of tensions would likely weigh on the dollar index.