MUFG’s Senior Currency Analyst Lloyd Chan highlights that the recent Oil price shock is reinforcing upside inflation risks in the United States and complicating the Federal Reserve’s policy outlook. With PCE inflation expected to remain near 3%, markets have sharply reduced expectations for Fed rate cuts this year, which is seen as providing near-term support for the US Dollar.

Fed cuts repriced with sticky inflation

"On the US macro front, PCE inflation due later today is expected to show inflation remaining sticky, still well above the Fed’s target and hovering around the 3% mark."

"The oil price shock adds to upside inflation risks and complicates the Fed’s policy outlook."

"Our estimates suggest that every USD10/bbl increase in oil prices could add roughly 0.2pp to US inflation."

"At around USD100/bbl oil, headline inflation could rise by close to 0.8ppt, while in a USD150/bbl scenario, inflation risks pushing decisively above 4%."

"Reflecting these risks, markets have sharply pared back expectations for Fed rate cuts this year, with easing expectations fading further as the US Iran conflict persists."

"At the same time, a potential delay in Fed easing in response to the oil shock is likely to provide near term support for the US dollar."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)