Rate Decisions Loom Large Amid Inflation Concerns

Market attention will be focused on the upcoming rate decisions from the Federal Reserve (FOMC), Bank of England, and Bank of Japan. The US dollar jumped 0.7% against major peers last week, while U.S. stocks finished modestly lower.

The revival of hostilities in the Middle East, fueled by a 5% jump in oil prices, has led to increased inflation concerns ahead of this week's FOMC meeting. Despite June inflation data showing US CPI eased by more than expected, the escalation of tensions and President Trump's decision to apply new tariffs have revived these concerns.

The market is pricing in a 35% probability that the Fed will hike rates, up significantly from 12% just 10 days ago. A hike is also 80% priced in by September, which would further lift the US dollar and Treasury yields. Non-yielding U.S. dollar-denominated gold could come under pressure if the Fed chooses to hike.

The Bank of England's rate decision on Thursday may hint at a more hawkish path towards a September move, supporting GBP. The market is currently pricing in around a 75% expectation of a September hike, with a 25 basis point move being fully priced in by December.