Brent crude pushes toward $91 a barrel as Houthi threats and record low stockpiles squeeze supply. Bank of America sees three Fed hikes ahead, shifting the dollar's path.
The dollar hit weekly highs as Brent crude pushed toward $91 a barrel, with safe-haven demand and supply risks from the Middle East converging. Houthi threats to block the Bab el-Mandeb Strait have kept traders on edge.
Rystad Energy estimated that 2.5 million barrels a day of Saudi exports could be disrupted. Goldman Sachs said Brent could reach $120 if the conflict drags on. Morgan Stanley warned there is no room for error. Global oil stocks excluding China are at record lows, the bank said. A disruption of that scale would draw down inventories rapidly, accelerating the price move.
A Reuters report that mediators proposed a 10-day ceasefire aimed at reviving a June deal sent the dollar lower on Wednesday. The gap between the opposing sides remains wide. Traders said the ceasefire is unlikely to hold, leaving supply risk elevated.
Higher oil raises the risk of a resurgence in U.S. inflation, Bank of America said. The bank forecasts three rate increases in September, October and December. The market has priced about 50 basis points of tightening. BofA said more aggressive tightening would be needed to return inflation to the 2% target. A 50-basis-point hike in September would be the first move of that size since the start of the tightening cycle.
The combination of higher oil and a stronger dollar tightens financial conditions. Bank of America said this could delay any eventual rate cuts. Before the oil spike, the market expected the Fed to cut rates in the second half. Those expectations have been pushed back, traders said.
| Fed Path Expectation | Current Market Pricing | Bank of America Forecast |
|---|---|---|
| Sep | 25 bp priced | 25 bp hike |
| Oct | 25 bp priced | 25 bp hike |
| Dec | 0-25 bp priced | 25 bp hike |
| Total | ~50 bp | 75 bp |
The medium-term outlook for EURUSD is bearish. The European Central Bank meets Thursday. No rate change is expected. The yield spread favors the dollar, traders said. The drag from higher oil on the euro area economy keeps the bias lower. Any short-term bounce from a hawkish ECB tone is likely to be shallow, traders added.
Data on U.S. oil inventories is due Wednesday from the Energy Information Administration. The ceasefire proposal's fate will likely determine the near-term direction for oil and the dollar.
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