US-Iran Conflict Escalates as Oil Prices Jump and Interest Rate Hikes Loom
The US and Iran have been involved in a series of escalating military actions. On Sunday, US forces struck Larak Island, which is located near the Strait of Hormuz, after personnel were seen preparing to launch rockets with sea mines towards the strait. In response, Iran launched ballistic missiles from several provinces and anti-ship cruise missiles towards the Strait of Hormuz.
Treasury Secretary Scott Bessent stated that new secondary sanctions on Iran are likely, focusing initially on banks, after penalties were imposed on a UAE branch of Banque Misr over alleged financial links to Iran. He also mentioned that a full cut-off from the dollar system is possible next.
The yen firmed on the session despite USD/JPY weakening earlier in the day, with Japanese yields extending their climb. The 10-year JGB yield reached its highest level since September 1996, while the 5-year yield touched a record high near 2.21%. China's official manufacturing PMI improved to 49.8 in August from 49.2, but remains in contractionary territory for a second straight month.
The US Central Bank is considering hiking interest rates due to hawkish remarks made by Kevin Warsh at the Jackson Hole conference. Barclays has revised its Fed outlook to expect back-to-back 25 basis point hikes in September and December.