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The prospect of higher oil prices is expected to raise US inflation expectations and send the DXY index higher, while weighing on EM Asian currencies further particularly the high-yielding INR and IDR, according to the latest research report from Scotiabank.
US President Donald Trump announced on Tuesday afternoon ET that the US will withdraw from the Iran nuclear deal and is preparing to reinstate all sanctions it had waived as part of the accord. In addition, the Trump administration is planning to impose additional economic penalties according to The New York Times. The move will intensify geopolitical uncertainty and undermine the upcoming talks with North Korea in our view.
In the meantime, President Trump also announced at the White House that Secretary of State Mike Pompeo is en route to Pyongyang to continue preparations for his upcoming summit with North Korean leader Kim Jong Un who met with Chinese President Xi Jinping in Dalian on Monday and Tuesday.
Global benchmark oil prices are now hovering around the psychological levels. Crude oil prices are set to rise further amid escalating geopolitical risks, as indicated by a heavy net long position in non-commercial oil futures and a backwardation market. Since late October 2017, WTI oil prices have been in "backwardation" with near-term prices higher than those for delivery in the future.
Fed Chairman Jerome Powell said Tuesday that the Fed and other major central banks’ rate hikes should not upend the global economy and the normalization of monetary policies in advanced economies "should continue to prove manageable" for emergingmarket economies.
"The oil curve backwardation is expected to hold, suggesting that inventories are likely to keep falling and then lead to higher oil prices in the future. But at present, the market seems still worried about a faster path of monetary policy tightening, in our opinion," the report added.
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