"If Oil Drops to the $70 Range... Higher Odds of Fed Rate Freeze" [Weekend Money]

Trump’s Approval Ratings and Iran’s Economic Woes Intersect
Provisional Ceasefire Expected Before US Midterm Elections
Potential Dollar Weakness and Korean Won Strength

As tensions between the United States and Iran ease, international oil prices are experiencing a steep decline. Analysts suggest that if oil prices return to the 70-dollar range, the likelihood of the US Federal Reserve keeping interest rates unchanged for the remainder of the year will increase.

According to iM Investment & Securities on August 29, the price of West Texas Intermediate (WTI) crude oil dropped by 3.1% from the previous month to $82.36 per barrel, putting a return to the 70-dollar range within reach.

The drop in oil prices has also pushed down long-term Treasury yields, which had previously surged. Yields on the 10-year and 30-year US Treasuries fell by 7 basis points and 6 basis points, respectively, from the previous day. In particular, the 30-year yield declined to the 5.1% range. The long-term bond market, which had shown a lukewarm response despite the US Treasury’s decision to expand buybacks, reacted immediately to the easing of inflation concerns caused by falling oil prices.

Considering the current economic and political circumstances facing both sides, there is a high probability of at least a “provisional ceasefire” being reached before the US midterm elections, even if a complete truce is not achieved. For US President Donald Trump, with the midterm elections ahead, an early exit strategy is necessary to boost approval ratings, and stabilizing oil prices to resolve price-related risks is essential for bringing long-term Treasury yields under control, the biggest obstacle for financial markets. For Iran, the prolonged war and severe US economic sanctions have inflicted significant economic damage, making it increasingly difficult to sustain military conflict.

Sanghyun Park, a researcher at iM Investment & Securities, stated, “If international oil prices fall back into the 70-dollar range, reduced inflationary risk will ease the burden of long-term Treasury yields. Depending on the extent of the oil price decline, the probability of the Fed keeping rates unchanged for the remainder of the year will increase further.” He added, “If the decline in oil prices continues, the spread of debasement trades (transactions taken in anticipation of currency devaluation) will likely serve as an additional factor weakening the US dollar and strengthening the Korean won.”

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