Oil: Stagflation risks and FX volatility – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong highlight that Brent’s move above USD100/bbl and rising Hormuz disruption risk raise the odds of a durable energy shock, with markets bracing for stagflation and a stronger Dollar. They warn that a prolonged shock could sharply lift FX volatility and weigh on energy-importing Europe and Asia through 2026.

Brent surge raises stagflation concerns

"Crude oil has climbed back above USD100/bbl as Iran escalates attacks on oil and transport infrastructure across the Middle East, raising the odds of a prolonged disruption at the Strait of Hormuz. Persistently elevated prices are stoking concerns that the conflict could trigger a more durable—and not merely temporary—energy shock. That would reshape how markets assess inflation and growth risks."

"Higher oil and rising risk aversion supported the USD overnight, aided by the greenback’s haven appeal and the US’s relative insulation as a large energy exporter. USD gains have been orderly, helped by interest-rate markets aligning around central banks – across not just the Fed but also ECB and BoE -- leaning more toward inflation risks than growth. A short-lived conflict and rapid restoration of oil flows would justify today’s muted FX reaction."

"But if the energy shock endures, FX volatility is likely to rise sharply, especially as prolonged high prices become increasingly growth-negative for energy-importing Europe and Asia."

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