Forex News
- WTI Oil hits fresh monthly lows sub-$86, on track for a 15% decline in the last two weeks.
- News of a US-Iran truce extension has triggered a moderate risk appetite.
- EIS Crude Oil Stocks Change figures revealed that US Oil reserves dropped for the fifth consecutive week.
Crude prices trend lower for the third day in a row on Friday, with the US benchmark West Texas Intermediate (WTI) barrel trading around $86.50 at the time of writing after hitting one-month lows a few pips below $86.00. WTI Oil is on track for a nearly 15% decline over the last two weeks.
A moderate risk-relief rally following news that Washington and Tehran have reached a memorandum of understanding to extend the ceasefire for 60 days sent oil prices and the safe-haven US Dollar lower, boosting a moderate rebound on equity markets on Friday.
The agreement, still pending US President Donald Trump’s approval, would allow negotiations on Iran’s nuclear program to continue and, according to Axios, would also lift restrictions on sea traffic through the Strait of Hormuz. Investors, however, have taken the news with only lukewarm enthusiasm.
On Thursday, data from the US Energy Information Agency (EIA) revealed that crude Oil inventories declined by 3.327 million barrels in the week of May 22. This is a softer drawdown than the 5 million forecast and less than half the 7.864 million barrels drop seen in the previous week. That said, it makes the fifth consecutive weekly decline and highlights the depletion of US energy stockpiles since the start of the Middle East conflict, keeping Oil prices from depreciating further.
WTI Oil FAQs
WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.
Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.
The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.
OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.
DBS strategist Philip Wee notes markets have strong expectations that the European Central Bank will hike at its next meeting, even as the Federal Reserve (Fed) debates internal reforms.
ECB tightening supports EUR/USD
"Newly sworn-in Fed Chair Kevin Warsh will still face his first true test at managing a divided Fed at the June 16-17 FOMC. The committee voted 8-4 to keep the Fed Funds Rate unchanged at the April meeting, with one member favouring a 25-bps cut and three members objecting to maintaining the easing bias language.
"Against this background, it was not surprising that ECB President Christine Lagarde believed the Fed’s independence was still at risk."
"While the Fed debates internal structural reforms, other major central banks are playing a more straightforward defensive game."
"The markets have the strongest bets for the European Central Bank, the Bank of Japan, and the Reserve Bank of New Zealand to hike at their next meetings."
"A DXY Index below 98 could send EUR/USD back above 1.18."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Philip Wee of DBS Group Research highlights that US Treasury yields have eased as PCE inflation moderates, but headline inflation remains elevated, keeping real Fed Funds Rates in focus. New Fed Chair Kevin Warsh faces a divided FOMC at the June meeting, with prior votes split on cuts and guidance. Markets see this as part of a broader shift toward a potentially lower US rate regime.
Warsh faces divided FOMC in June
"The US Treasury 10Y yield eased by 11 bps in the first four days of this week to 4.447%, down significantly from its 4.685% peak on May 19."
"US PCE inflation decelerated from 0.7% MoM in March to 0.4% in April, while Core PCE inflation slowed to 0.3% to 0.2%."
"In YoY terms, headline inflation rose to 3.8% from 3.5%, fuelling concerns among some Fed members that the 3.50-3.75% real Fed Funds Rate was below its neutral zone."
"However, Bessent expects US disinflation to return, driven by lower oil prices."
"But newly sworn-in Fed Chair Kevin Warsh will still face his first true test at managing a divided Fed at the June 16-17 FOMC."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
ING’s Francesco Pesole notes that the Canadian Dollar remains a G10 laggard despite a pause, with short‑term rate differentials and global equities driving USD/CAD. While de‑escalation in the Middle East and better risk sentiment could push USD/CAD lower, Canadian inflation and labour data argue against a hawkish Bank of Canada, and USMCA renegotiation risks keep a risk premium embedded in ING’s forecasts.
Relative rates and trade risks weigh
"The Canadian dollar took a breather today, but remains a key laggard in the G10 in May."
"In our short-term fair value model, global equities and short‑term rate differentials are doing the heavy lifting in driving the pair."
"Further de‑escalation and improved risk sentiment would likely push USD/CAD lower, but relative rates continue to provide an important offset."
"Canadian inflation and labour market dynamics argue against any near‑term hawkish shift from the BoC, and markets remain more comfortable pricing out BoC tightening than Fed tightening."
"In our baseline scenario – which is rather optimistic on Middle East developments – we have USD/CAD trading back to 1.37 by the end of June and 1.36 by the end of the third quarter."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner note that the Dollar has softened after news of a tentative ceasefire extension between the US and Iran, but remains stronger than in early May. They stress that reopening the Strait of Hormuz is key for a larger Dollar decline, while a hawkish Federal Reserve tone keep tightening expectations alive.
Headline risk keeps Dollar elevated
"The US and Iran have reportedly agreed to a tentative 60-day extension of the ceasefire, which is awaiting US President Donald Trump’s approval. That has offered investors some relief after yesterday morning's fears that new military skirmishes could have led to a broader re-escalation. The question now is whether the Strait of Hormuz will reopen soon or the extended ceasefire will only lead to another prolonged stalemate."
"The dollar fell across the board after yesterday’s headlines, but DXY is still trading a non-trivial 1% above the early-May levels."
"The reasons are again to be found in a hawkish Fed tone and inflation data keeping markets betting on tightening (15bp by year-end) despite lower energy prices."
"Yesterday’s marginally sub-consensus core PCE (0.2% month-on-month) didn’t particularly dent Fed pricing, perhaps suggesting markets want to see the next CPI report before erasing hike bets."
"The dollar remains entirely headline-driven. Strong indications that the Strait of Hormuz has started to reopen for traffic can still send USD materially lower across the board, but equally, a prolonged stall can bring DXY back to 99.50 even without a military re-escalation."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
- GBP/USD gives away Thursday's gains on Friday, and returns to levels near 1.3400.
- BoE Bailey has practically discarded any near-term interest rate hike.
- In the US, PCE inflation data keeps pressure on the Fed to raise borrowing costs.
The British Pound (GBP) drifts lower against the US Dollar (USD) on Friday, reaching session lows at 1.3408 so far, on track for a moderate weekly decline. Bank of England Governor Andrew Bailey has practically discarded any interest rate hike in the near future, while US data adds pressure on the Federal Reserve (Fed) to tighten its monetary policy.
Bailey affirmed at an economic meeting in Reykjavik that ”there is a case for tolerating temporarily above target inflation," and added that economic activity and the labour market are weighing on second-round effects. The BoE chied also stated that, having taken expected cuts off the table, the bank has already tightened policy considerably in response to the shock relative to what had been expected by markets.
US-Iran ceasefire extension fuels a mild appetite for risk
Sterling's downside attempts, however, remain limited, with a moderate risk appetite undermining demand for the safe-haven US Dollar on Friday. News that the US and Iran have reached a memorandum of understanding to extend the ceasefire for another 60 days and limit restrictions on sea traffic through the Strait of Hormuz has been celebrated by the market, although the agreement is still pending US President Donald Trump’s signature.
In the US, data released on Friday revealed that the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) inflation gauge of choice, accelerated to its highest levels in three years, adding strain to household incomes and economic activity.
These figures add to the case of Fed hawks and keep hopes of an interest rate hike alive. The CME’s Fed Watch Tool shows a nearly 50% chance of an interest rate hike before the end of the year.
Minneapolis Fed President Neel Kashkari, on the contrary, has cooled hopes of upcoming monetary tightening. Kashkhari warns that it is premature to conclude that the central bank will raise rates right away after April’s PCE inflation data release, and added that the Iran war has clouded the inflation outlook.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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