The political crack between West and OPEC+ is reflecting itself on the market by the correlation coefficient change between DXY, Oil and USIRY.
FED as the main player between those 3 usually were taking shots and others follow accordingly. However, while FED is trying to contain inflation OPEC+ is cutting production to stop Oil prices from free fall, which in its turn makes inflation stickier. Right now a war between West and East is going on financial markets can be called a Battle of Inflation.
The last CPI releases from the US showed a significant drop in inflation, down to 5%, which is the exact same level as the FED Funds Rate. It is expected that FED will increase the rates for another 25bps in the May meeting, and US banks showing good profits today gave more confidence to FED to go with the rate hike. The US Banking crisis was a major barrier to the FED's confidence in the rate hike, keeping in mind that any panic in the markets could turn into a domino effect and crash the system. Right now circumstances will allow FED to hike and that will give strength to USD across the board.
A stronger USD will put pressure on Oil to fall and bring Inflation down with itself. It is crucial to keep in mind that Oil prices have a significant impact on inflation. Deflatinory trades may bring good returns in this environment.
U.S. Treasury bonds can potentially benefit from deflation because the value of money increases, which can cause interest rates to fall. When interest rates fall, the value of existing bonds increases.
FED as the main player between those 3 usually were taking shots and others follow accordingly. However, while FED is trying to contain inflation OPEC+ is cutting production to stop Oil prices from free fall, which in its turn makes inflation stickier. Right now a war between West and East is going on financial markets can be called a Battle of Inflation.
The last CPI releases from the US showed a significant drop in inflation, down to 5%, which is the exact same level as the FED Funds Rate. It is expected that FED will increase the rates for another 25bps in the May meeting, and US banks showing good profits today gave more confidence to FED to go with the rate hike. The US Banking crisis was a major barrier to the FED's confidence in the rate hike, keeping in mind that any panic in the markets could turn into a domino effect and crash the system. Right now circumstances will allow FED to hike and that will give strength to USD across the board.
A stronger USD will put pressure on Oil to fall and bring Inflation down with itself. It is crucial to keep in mind that Oil prices have a significant impact on inflation. Deflatinory trades may bring good returns in this environment.
U.S. Treasury bonds can potentially benefit from deflation because the value of money increases, which can cause interest rates to fall. When interest rates fall, the value of existing bonds increases.
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