Oil Price Surge Drives Up Inflation Expectations, Boosting Dollar

The US dollar has gained traction due to rising Treasury yields and ongoing tensions in the Middle East. This, combined with high oil prices, is amplifying inflationary pressures, forcing the Fed to consider a more aggressive rate hike than initially expected.

Lisa Cook's recent comments reinforced this notion, stating that factors such as high oil prices will drive up inflation in the coming months. The prolonged period of high oil prices has created second-order effects, feeding into core inflation and putting upward pressure on interest rates.

The Brent crude market is also sending a signal regarding expectations for the situation in the Middle East. November Brent futures are trading at $107, compared to $100 for the October expiry, with a sharp increase in the spread from $1-2 to $7.

Despite reports of increased traffic through the Strait of Hormuz and resumption of operations on the East-West pipeline, the US blockade is hindering Iranian oil sales. This has led to a widening of the backwardation, increasing the risk of an escalation of the conflict by Iran.