Resurgent Oil Rise Complicates Fed Decision Making — Market Talk

0937 ET - Markets are pricing in about a 64% chance the Fed will hold rates steady later today, but investors will be watching closely for any signals from Chairman Kevin Warsh on the path of monetary policy ahead. After cooler-than-expected June inflation data, volatile energy prices tied to tensions in the Middle East have re-escalated concerns about resurgent inflation. Warsh has indicated that the Fed will restore price stability and the central bank has no tolerance for inflation above its target. The question is whether the committee will act soon on these inflationary pressures or wait for more evidence that inflation is cooling. ([email protected])0852 ET - Renewed hostilities in the Middle East are pushing up Treasury yields as oil prices rally. The Iranian surprise attacks add uncertainty to U.S. monetary policy. Futures markets price in 64% odds of a hold by the Fed today, but bets on a hike rise to 36% from 31% yesterday, according to CME data. A hold would likely come with hawkish dissent, some analysts forecast. The 10-year yield is at 4.635%, up from 4.604% yesterday. The two-year rises to 4.318% from 4.275%. ([email protected]; @ptrevisani)0833 ET - The dollar could weaken if the Federal Reserve keeps interest rates unchanged in a decision at 1800 GMT given markets price some chance of a rate rise, HSBC's Daragh Maher says in a note. Three or more Fed members would need to vote in favor of raising rates to limit any initial dollar weakness, he says. If the Fed raises rates, the dollar's initial gains are likely to be far greater than any initial falls in the case of policy action, he says. "A swifter-than-expected hike will force the market to consider whether it is the first hike in a sequence of hikes," Maher says. In contrast, inaction shouldn't massively impact expectations for a September rate rise, he says. ([email protected])0832 ET - Upcoming eurozone second-quarter economic growth and inflation data could support the case for further interest-rate rises, although the euro's reaction might be limited, Union Bancaire Privee's Peter Kinsella says in a note. Data Thursday could show a return to growth of 0.2% quarter-on-quarter while data Friday could show inflation rose to 2.9% in July. Markets are likely to continue betting on one final 25 basis-point rate rise at the European Central Bank's September meeting. With a September move largely priced in, there is little room for the euro to benefit in the near term and the currency should continue to trade at the lower end of recent ranges, he says. The euro falls 0.1% to $1.1375.([email protected])0830 ET - Bitcoin gains modestly as U.S. stock futures mostly rise ahead of the Federal Reserve's policy decision at 1800 GMT and earnings from tech giants. "Although it's unlikely that the Fed will hike interest rates on Wednesday, the new regime at the central bank has done away with forward guidance, increasing the risk of surprises," XM analyst Raffi Boyadjian says in a note. Microsoft and Meta are both due to publish results after Wall Street closes. Any signs that more big tech companies are tapping into their free cash flow to pay for costly AI vanity projects will likely spook investors, Boyadjian says. Bitcoin rises 0.8% to $64,387, LSEG data show.([email protected])0719 ET - The Swiss franc could fall further as subdued inflationary pressures should prevent the Swiss National Bank from raising interest rates, Commerzbank's Michael Pfister says in a note. The SNB is likely to keep rates unchanged until the end of 2027, but the market continues to price in the chance of a rate rise, he says. "As our model suggests that imported inflationary pressure is moderate, the interest rate differential between the euro-area and Switzerland is likely to persist for some time." This should support the euro versus the franc over the medium term, he says. The euro rises to a six-and-a-half-month high of 0.9344 francs, LSEG data show. ([email protected])0615 ET - Geopolitical concerns are the main drivers of U.K. government bond yields, or gilt yields, rather than domestic worries, MFS Investment Management's Benoit Anne says in a note. Investors are paying attention to the government's economic plans and the ways these plans will be funded. Markets, however, "seem prepared to give the new government the benefit of the doubt, provided fiscal discipline holds," he says. This year's budget will be key for investors as it will likely to provide more details on the government's economic measures and the source of funding, Anne says. Ten-year gilt yields rise 2.3 basis points to last trade at 4.980%, Tradeweb data show. ([email protected])0611 ET - Decent growth in U.K. consumer credit and a rebound in mortgage approvals in June suggests households haven't become overly cautious due to the Iran war, RSM U.K.'s Thomas Pugh says in a note. This points to second-quarter growth holding up, he says. Households' bank deposits increased by more than the six-month average, while the rise in approvals to 58,200 suggests the housing market is picking up after May's drop, he says. "The resilience [in the housing market] seen so far suggests fundamental demand remains solid for now." However, mortgage rates have now reset higher, inflation is set to rise, and survey measures of house prices and activity are losing momentum, signaling that house-price growth will slow, Pugh says. ([email protected])0603 ET - The GBP7.7 billion increase in U.K. net mortgage lending in June was the biggest since March 2025, but it isn't a sign that the housing market is back on its feet, Capital Economics' Paul Dales says in a note. "Instead, it probably reflects the hump of completions after people locked in mortgage rates before the jump after the Iran war started at the end of February," he says. Mortgage approvals only partially reversed the drop in May, rising to 58,2000 from 56,565, well down from 65,207 in April. "As a result, transactions and net mortgage lending will be more subdued in the coming months," Dales says. ([email protected])0559 ET - U.S. Treasury yields rise as fresh military escalation in the Middle East causes oil prices to rise. The dollar weakens slightly meanwhile ahead of the Federal Reserve's rate decision later. "Yields could climb further if energy prices increase significantly amid any sustained escalation in geopolitical tensions in the Middle East," says BankPro's Paolo Broccardo in a note. Any indication about inflation concerns could support hawkish expectations and lift the dollar and yields, while a surprise or strong dissent could also affect sentiment and fuel volatility, he says. The Fed is expected to stay on hold but a hike can't fully be ruled out. The 10-year yield is up 1.8bps at 4.622%, according to Tradeweb. The DXY dollar index falls 0.1% to 101.363. ([email protected])0534 ET - The Japanese yen's weakness looks set to persist as the Bank of Japan is unlikely to deliver any significant policy changes on Friday or signal a faster pace of tightening, Union Bancaire Privee's Peter Kinsella says in a note. The yen continues to illustrate negative real inflation-adjusted interest rates, he says. "In the absence of a credible commitment to raise rates aggressively, we struggle to see yen appreciation even if the BOJ would like to see this." Investors should expect more threats from Japanese authorities about interventions to prop up the yen but talk is cheap, he says. The dollar falls 0.2% to 163.57 yen but remains near the 40-year high of 163.98 reached last week, LSEG data show. ([email protected])0524 ET - The Bank of England should leave its key interest rate at 3.75% on Thursday, although it could warn of a possible hike if energy prices rise significantly or second-round inflationary effects surface, Berenberg's Andrew Wishart says in a note. That doesn't mean a hike is likely, however. The threat alone, along with higher oil prices, would be sufficient to increase interest-rate expectations and mortgage borrowing costs, thus reducing inflation risk, he says. Instead, Wishart says the BOE could actually resume rate cuts in December, then lower the policy rate to 3.0% in mid-2027. Wage and services inflation is trending lower, while President Trump will want to avoid higher oil prices into the midterm elections, he says. ([email protected])