Interest rates

Prospect of higher U.S. interest rates adds to oil downtrend

As FX Empire has pointed out for some time, a plethora of bearish factors continue to weigh on the price of oil, including concerns over lower demand from major global buyers, anticipation of a new “nuclear deal” with Iran and the political and economic crisis. the need for the United States to lower prices, among other things. Further bearish pressure came from the United States overnight, with Federal Reserve Chairman Jerome Powell telling an IMF meeting that: “Fifty basis points [rise in benchmark US interest rates] will be on the table for the May meeting [of the US Fed].”

Since money goes where it is best rewarded for the relevant risk taken, a rise in US interest rates would likely strengthen the US dollar. This, in turn, would make it more expensive to purchase it in the local currencies of net oil importers and further dampen demand from major global buyers of the product.

Worse still, such hawkish statements about interest rate hikes from senior U.S. Federal Reserve officials are generally seen by all financial markets as a sign of a concerted, potentially long-term effort to combat the rising domestic inflationary pressures by increasing the cost of money. The world’s key crude oil importers could therefore take Powell’s statement as a signal of a sustained program of US interest rate hikes, leaving them facing soaring local currency costs for their imports. of oil.

A stronger dollar makes oil even more expensive in local currency

This was seen very recently with Japan and was a key reason, as predicted by FX Empire, for the continued weakening of the JPY through the key resistance level of 125.00 USDJPY. Given the negative effect on local currency prices from rising oil and other liquid commodities denominated in USD for Japan, there is every reason to expect this weakening of the JPY to continue.

The same applies to the currencies of all major net oil importers if the relevant central banks of the countries concerned do not take decisive action to counter these price pressures, as the Monetary Authority of Singapore, as FX Empire pointed out. The Bank of Japan, however, has shown no such determination to counter JPY weakness, with its governor, Haruhiko Kuroda, having repeatedly stated that “a weak yen is generally positive for the Japanese economy.”

The next meeting of the US Federal Reserve, at which an interest rate hike could be implemented, will take place from 3rd at 4and of May.