Rate Expectations Driving Dollar Higher
The US Dollar continues its impressive run, riding higher even as oil prices have pulled back from recent peaks. Driven by rising Treasury yields and persistent inflation expectations, the greenback has crossed above the 101 level on the DXY and is up around 2.3% month-to-date. This strength is perhaps best illustrated by USDJPY trading above 161.50, even after the Bank of Japan raised rates to their highest level since 1995 this month. The dramatic U-turn in Fed interest rate expectations - from anticipated cuts to the real possibility of hikes - has been the dominant force behind the Dollar’s surge, much of it fuelled by the energy price shock from the US-Iran conflict.
Risk premium in oil has continued to unwind following the US-Iran roadmap toward a peace deal signed in Switzerland at the start of the week. Iranian oil is now permitted for sale under a 60-day US Treasury waiver, and there are early signs that tanker traffic through the Strait of Hormuz is picking up, although exact volumes remain hazy. The net result is that WTI is now trading roughly $15 lower than at the start of the month. However, the market is still waiting for clear evidence of sustained normalisation before committing to a full return to pre-war price levels. For now, oil remains headline-driven and sensitive to any twist in the diplomatic narrative.
Gold remains very much at the mercy of the Dollar’s momentum. While oil has dropped, it has failed to drag the greenback lower with it, and gold’s historically inverse relationship with the USD is playing out in full force. Anticipation of one or more Fed rate hikes this year to tame inflation is hurting the zero-yielding metal. Gold has been unable to sustain any meaningful recovery, trading near the lower end of its recent range as higher yields and a stronger Dollar keep pressure on. Support levels await at $4085 and $4035, with resistance waiting at $4196 and $4360. A $3800 - $4360 trading range looks to be in play for gold in the near-term whilst the USD retains its rate-fuelled momentum.
Tech stocks are again coming under scrutiny this week, partly due to profit-taking after strong recent runs - including the KOSPI and Nikkei 225 reaching fresh record highs - and partly due to growing questions around the monetisation of massive AI investments. Despite the scrutiny, the sector has a solid track record of bouncing back after sell-offs. The market often concludes that, even at elevated valuations, technology remains one of the best-placed areas to generate superior long-term returns. A further rotation into other sectors may occur and may also ultimately be healthy, though recent earnings seasons have demonstrated that tech stocks are still the EPS (earnings per share) and revenue outperformers.
Looking ahead, the main macro focus this week is Thursday’s US Core PCE data, the Fed’s preferred inflation gauge. With attention squarely on when a rate hike might arrive, with late Q3 or early Q4 now the leading contenders, a hot reading above expectations could make an already rate-nervous market even more anxious. This would likely give the USD further upside potential and push Treasury yields higher still. If macroeconomic pressures force the Federal Reserve into a corner where further rate hikes start to look inevitable, it will provide the latest test for global equities in what has otherwise been a record-setting year. The three major US indices, along with the Nikkei and the Kospi are among those to chalk up all-time highs in 2026.
Overall, US macro data with a view to rates, and US-Iran rhetoric and actions and its impact on oil, will continue to be the prime market movers.
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