The Influence of Rising Oil Prices on Fed Rate Expectations and the US Dollar

The higher price of oil could already be starting to have an influence on Fed rate expectations for next year. The amount of rate cuts priced in by December of next year has been pared back to around -83bps. If the Fed is encouraged to keep rates on hold for longer it would pose upside risks for our US dollar forecasts (click here).

In our latest monthly FX Outlook report we pushed back our forecasts for further Us dollar weakness and the start of Fed rate cuts into 1H of next year. Bringing developments back to today, the release of the US CPI for August is expected to reveal a pick-up in headline inflation (+0.6M/M) while core inflation is expected to increase at a slower pace (+0.2%M/M) for the third consecutive month.

The recent faster than expected slowdown in inflation, employment and wage growth has reinforced market expectations that the Fed will leave rates on hold this month.

There are currently only 2bps of hikes priced in for the 20th September FOMC meeting. There would have to be a significant upside for inflation today to alter market expectations for the Fed to remain on hold. Looking at price action around CPI report releases this year, the dollar index has weakened in the first 30 minutes after releases following the last six CPI reports.