The latest flare-up in Middle East tensions could shape market reactions to this week’s key economic events on Tuesday. The latest US CPI report will be released shortly before Fed Chair Kevin Warsh delivers his first semiannual testimony to Congress. Both events could influence the Fed’s next policy move and the direction of the US dollar.
Warsh has made inflation the Fed’s top priority since taking office last month. Energy prices remain one of the biggest drivers of inflation, and tensions around the Strait of Hormuz continue to create uncertainty. Iran claims it closed the Strait after attacking a ship in Omani waters on Saturday. The US says the Strait remains open and has not restored its blockade on Iranian exports. However, many shipping companies have stopped sending vessels through the area because of security concerns.
Crude Rises, Inflation Outlook Remains Uncertain
Brent crude climbed close to $80 per barrel after the latest exchange of strikes between the US and Iran. Prices remain below the highs reached earlier in the conflict. However, they have moved back above pre-conflict levels, renewing inflation concerns.
Markets expected the latest tensions to ease over the weekend as US and Iranian officials prepared to restart negotiations. Those talks never resumed, and the conflict continues.
Many investors expected the Strait of Hormuz to reopen gradually before year-end. That outlook would have eased pressure on energy prices. If energy costs stay high, markets may need to revise inflation expectations. Currency markets could become more volatile because inflation affects each economy differently. Investors still cannot tell whether tensions will ease or escalate.
What Markets Are Watching
The June US CPI report comes first. Economists expect monthly headline inflation to fall to -0.1% from 0.5% in May. That would mark the first monthly decline in several months. Annual inflation is expected to slow to 3.8% from 4.2%. Lower oil prices during the period following the MOU helped drive that decline.
Core CPI, which excludes food and energy, is expected to remain at 2.9%. The Fed pays closer attention to this measure. Since taking office, Kevin Warsh has consistently highlighted inflation as the central policy issue.
Markets continue to raise expectations for tighter monetary policy. Traders now see roughly even odds of a September rate hike. Expectations for a July hike have also risen to more than 30%, compared with almost zero a month ago.
Warsh and the Dollar Outlook
After the CPI report, attention will shift to Congress as Warsh delivers his first semiannual testimony. The Fed has already published his prepared remarks. They repeat the main messages from the latest FOMC meeting. Warsh continues to support a hawkish stance, keeps inflation at the center of policy, and describes the economy as broadly resilient.
Investors will closely watch the question-and-answer session. They hope Warsh will offer fresh insights beyond his prepared remarks. However, he has repeatedly downplayed forward guidance, which could leave markets searching for direction.
If Warsh maintains a hawkish tone and shipping through the Strait remains disrupted, the US dollar could strengthen further while gold may face additional pressure.
