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The latest CPI report matched forecasts, allowing the Federal Reserve to maintain a wait-and-see approach on inflation. However, rising crude oil prices due to the Iran conflict have complicated this stance. West Texas Intermediate (WTI) crude surged $1.52 to $84.90, peaking at $89, while US 10-year Treasury yields climbed 5 bps to 4.19%. The interplay between oil prices, inflation, and economic growth remains critical for bond markets, alongside geopolitical tensions from US tariffs and military actions. Despite the yield increase, US equities gained traction, with the S&P 500 turning positive after Oracle's 12% earnings-driven rally. The rise in Treasury yields has bolstered the US dollar, particularly against the yen, with USD/JPY rising to 158.54. Investors are closely monitoring whether 10-year yields will break above 4.30%, a level last seen in January 2024, which could signal prolonged tightening. Fed policy uncertainty looms as Jerome Powell is unlikely to cut rates in March or April, but the market assigns a 39% chance of a cut under potential successor Kevin Warsh in June. Trump's influence on Warsh's dovish stance adds volatility to rate expectations. For Gulf investors, the oil-driven inflationary pressures and USD strength could impact regional equity markets and commodity-linked assets. The Strait of Hormuz's closure and ongoing Iran tensions remain key risks. Traders should watch 10-year yields' movement toward 4.30%, Fed communication shifts, and oil price stability. A sustained USD rally might pressure Gulf currencies, while equity markets could benefit from tech sector outperformance.
