USD: War-driven oil shock clouds Fed path – Commerzbank

Commerzbank’s Antje Praefcke argues that US inflation data are unlikely to move the Dollar near term, as markets focus on Oil and the Iran war. She outlines two scenarios for the conflict’s duration and their implications for Fed policy and Dollar performance, stressing that future Fed reaction under new leadership could cap sustained Dollar gains.

Oil shock scenarios and Fed credibility

"Even if today's figures come in lower than expected, they are unlikely to have a major impact on the US dollar."

"If the conflict is resolved relatively quickly, leading to a rapid recovery in oil prices, the Fed and other central banks would in all likelihood look through the short-term “oil bump” in inflation rates - in other words, they would describe the effect as temporary."

"If the conflict drags on and energy prices remain high, the situation could become more complicated for the Fed. Rising inflation rates would necessitate “high for longer” (i.e., unchanged key interest rates for a longer period of time) - the market has already postponed its expectations of Fed rate cuts."

"After that, however, the question would still remain as to how the “Fed after Powell” would shape its monetary policy, whether it would at least partially yield to political pressure for lower interest rates or not."

"Even if the dollar were to be an outperformer in the short term for the reasons often cited (safe haven etc.), the topic of “Fed monetary policy in the Warsh era” is likely to soon take up more space in investors' considerations again."

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