Oil prices extended their recent gains this morning, approaching a two-week high as the United States and Iran continue to struggle to reach an agreement that could pave the way for the reopening of the Strait of Hormuz.
Progress towards a deal has stalled following separate attacks on shipping in the Strait of Hormuz and the Bab el-Mandeb Strait. Iran has warned that Hormuz will remain closed unless Washington accepts its conditions for ending the conflict, adding to concerns over further disruption to global energy supplies.
The continuing rise in crude oil has also placed upward pressure on European borrowing costs. German government bond yields remain close to one-week highs as elevated energy prices, continued conflict in the Middle East and rising domestic inflation complicate the outlook for Europe’s largest economy.
Elsewhere, investors are eagerly awaiting the release of July’s US inflation figures, which could play an important role in shaping expectations ahead of the Federal Reserve’s September interest rate decision.
Headline inflation is forecast to rise by 0.1% month on month, following a 0.4% decline in June. On an annual basis, inflation is expected to ease slightly from 3.5% to 3.4%. Core inflation, which excludes volatile food and energy prices, is forecast to rise by 0.2% over the month and 2.5% year on year.
Markets currently see the September decision as finely balanced between the Federal Reserve leaving interest rates unchanged and implementing a 25-basis-point increase.
A softer-than-expected inflation reading could reduce expectations of a September rate hike and place further pressure on the US dollar. Conversely, stronger figures could increase the likelihood of further monetary tightening and provide the dollar with some much-needed momentum.
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