USD Fluctuates Amid Rising Oil Prices and Trade Tensions

The US Dollar (USD) has had a mixed performance recently due to various market factors and growing pressure on the Federal Reserve (Fed) to cut interest rates. According to Scotiabank strategists Shaun Osborne and Eric Theoret, rising oil prices, particularly Brent's nearness to $100 after attacks on Saudi oil infrastructure, have contributed to the USD's fluctuations. Additionally, trade tensions are escalating as President Trump has taken aim at Canada through social media, threatening a broader trade war unless the Fed cuts interest rates.

The administration's pressure campaign for lower rates appears to be intensifying, with Vice President Pence suggesting that the Fed should ease policy last week. However, some Federal Reserve officials remain concerned about inflation, with Cleveland Fed President Hammack advocating for tighter policy just before the FOMC blackout. The upcoming US Producer Price Index (PPI) and Consumer Price Index (CPI) data will be crucial in determining the Fed's decision at its September 16th meeting.

The market still prices a 60% chance of a 25bps hike next week, despite the growing pressure for rate cuts. The USD has been affected by a slightly steeper Treasury curve and softer stocks, while US yields have increased. To mitigate these risks, signs of progress on inflation need to be clear in this week's PPI and CPI data.