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Fed decision eyed as oil shock lifts chances of a July rate hike

CME FedWatch shows nearly a 30% probability of a 25 bps hike, up from about 15% a week earlier, as WTI rebounds above $90 this month.

Reported · Written up by our desk · Major Pairs

The Federal Reserve is set to announce its interest rate decision on Wednesday, a move markets are using to gauge the outlook for inflation as crude oil prices rise. Markets broadly expect the Federal Open Market Committee to keep rates unchanged at 3.5% to 3.75% for a fifth straight meeting in July.

While expectations lean toward a hold, pricing in the possibility of tightening has increased. According to the CME FedWatch Tool, the probability of a 25 bps rate hike is nearly 30%, compared with about 15% a week earlier.

Oil has been a key driver of that shift in rate expectations. After crude fell roughly 35% from May to the end of June, WTI turned higher in July, helped by a pause in US and Iran strikes that temporarily halted naval activity in the Strait of Hormuz, pushing WTI above $90 from $67 at the start of the month.

Analysts said the odds for near-term tightening have moved as oil-driven inflation concerns resurfaced. FXDesk also highlighted that a hike would likely be treated as a hawkish surprise that strengthens the US dollar and puts pressure on EUR/USD, while a steady hold would hinge on how hawkish the guidance and any dissenters are, after the Fed statement is released at 18:00 GMT and Chair Kevin Warsh holds a press conference at 18:30 GMT.

Latest closeWTI crude $91.10 ▲3.2%|EUR/USD 1.122 ▼0.3%

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