Oil prices surged after Saudi Arabia and other OPEC+ producers announced a surprise round of output cuts, a potentially ominous sign for global inflation just days after a slowdown in US price data had boosted market optimism
OPEC+'s move was also playing out in currency and rate markets, as, said ING FX strategist Francesco Pesole, it had "fuelled fears that inflation will prove to be a longer-lasting problem for central banks."
"The ultra-volatile market pricing for the Fed’s rate path is once again set to be one of the most impacted," he added. Yields on U.S. two-year Treasuries rose 4 basis points to 4.11%, while Fed fund futures pared back expectations for rate cuts later in the year. The market nudged up the probability of the Federal Reserve hiking rates by a quarter point in May to 61% from a probability of 48% on Friday, and had 38 basis points of cuts priced in by year-end.
That in turn helped the dollar gain 0.6% on the Japanese yen to 133.6 , while the euro eased as much as 0.5% before rebounding to trade flat at $1.0833 . The rise in oil prices is bad news for Japan's trade balance given it imports most of its energy.The outlook for U.S. rates could be impacted by data on ISM manufacturing and several pieces of employment data out this week, most significantly Friday's non-farm payrolls report.
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