USD Strengthens as Hawkish Fed Expectations and Rising Oil Prices Take Hold

Global bond yields have increased due to higher oil prices and renewed US-Iran tensions, bolstering the value of the US Dollar. Markets are fully pricing in a 25bp Federal Reserve rate hike by October, with Fed Governor Barr stating that further increases may be warranted if inflation fails to moderate.

The recent escalation in the Middle East has brought inflation risks back into focus, pushing global bond yields higher. The move was accompanied by a bearish flattening of the US yield curve, a stronger USD and lower gold prices as markets moved to fully price a 25bp Fed rate hike by October.

JOLTS job openings data continues to indicate a low-hiring, low-firing labor market. The recent uptick in the vacancy-to-unemployment ratio suggests that moderation in wage growth could soon stabilize.

OCBC has updated its FX forecasts to reflect recent market moves following the USD's weakness during a period of policy uncertainty triggered by the Treasury's surprise EUR/JPY intervention and expanded buyback programme. Despite these adjustments, OCBC remains modestly constructive on the USD through early 2027.