Oil’s Upside Bias Holds as Deal Hopes Dim

The continued absence of any US-Iran agreement to re-open the Strait of Hormuz is keeping a clear upside bias in place for oil prices. As each day passes without a resolution, market angst is steadily increasing. Traders are growing more concerned that both sides are advancing demands that only add complexity and therefore reduce the likelihood of a workable deal materialising in the near term. Risk assets have so far been willing to tolerate Brent prices below $90 while the prospect of a deal remains somewhat in the works, helped by constructive remarks this week from Omani and Pakistani officials. However, any return of oil toward the $100 level would likely spoil the party and quickly reintroduce broader risk-off pressure.

The macroeconomic calendar this week is dominated by US inflation data. Wednesday’s CPI release is expected to show a marginal rebound on a monthly basis, while the annual rate is forecast to edge lower by 0.1 percentage points to 3.4%, down from 3.5%. Coming after last week’s dismal jobs report, a relatively well-behaved inflation print would further dial back expectations of a Federal Reserve rate hike in September. Conversely, any unexpected upside surprise in the CPI numbers would sour the mood for risk assets and strengthen the US Dollar if it brings a potential September tightening move more firmly into play.

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In foreign-exchange markets, the joint intervention efforts by Japanese and US authorities to support the yen have bought policymakers some time and more favourable conditions for the currency. Yet natural market forces are already eroding those gains. The USDJPY rate has pushed back above the 159 level, highlighting the challenge of overcoming the persistent yield differential between US and Japanese bonds. Separately, the Australian dollar has held its ground above the 0.70 level against the greenback. Although the Reserve Bank of Australia left rates unchanged yesterday as widely expected, the relatively hawkish tone from the RBA Governor has continued to provide underlying support for the AUD.

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Market dynamics have turned more favourable for gold in recent weeks. The metal has benefited from the intervention that helped push the Dollar Index below 100, while last week’s weak US employment data provided additional fuel for an upside break from the broad $3,950–$4,200 range in which it had been grinding. A soft CPI reading this week could supply the next spark and open a path toward the $4,500 area. That said, oil prices remain a clear risk. Should crude continue to trend higher, renewed inflation concerns would likely cap gold’s near-term advance and reassert themselves as a headwind. Levels to watch this week include support at $4,315 and $4,160, while resistance awaits at $4,480.