OPEC+ output cut gives dollar a lifeline

Over the weekend, OPEC+ surprised with the announcement of a more than a one million barrel-a-day output cut, only a few days after delegates had signalled no intentions to change production limits ahead of the cartel’s monitoring committee this week. Saudi Arabia alone pledged to cut 500,000 bbl/day, and Russia will extend the output cuts until year-end. Oil futures initially rose by as much as 8% and are now trading around 4% higher (Brent around $83.8/bbl this morning). Our commodities team has revised our 2023 average Brent price forecasts for $93/bbl.

All of this has fuelled fears that inflation will prove to be a longer-lasting problem for central banks. And while many central banks (like the ECB) have managed to reliably convey a hawkish message despite recent market turmoil, the ultra-volatile market pricing for the Fed’s rate path is once again set to be one of the most impacted. The Fed Funds future curve is currently pricing in a 63% implied probability of a May hike and less than 40bp of cuts by year-end in the US. By comparison, on 24 March, the same curve was embedding a 24% chance of a May hike and 88bp of cuts by year-end.In FX, we are seeing the unwinding of this dovish narrative being translated into a higher dollar this morning. This follows some decent momentum for the greenback at the end of last week on the back of some position squaring and catch-up with previous moves in Fed rate expectations. With crude prices being the driver of today’s FX moves, oil-sensitive currencies (NOK, CAD) are also being supported in the crosses, while the likes of JPY, GBP and the euro are paying the price of shrinking monetary policy divergence. Read More