The probability of the U.S. Federal Reserve’s raising policy rate during its July meeting has jumped significantly overnight, following the escalation in the Strait of Hormuz as Washington and Tehran continue to trade blows.
According to CME FedWatch Tool, the odds for a 25 basis-point rate hike in July jumped from 34.2% to today’s 43.3%. This is also compared to a 25.7% odd for a rate hike a week ago and 8.3% a month ago.
Escalation in the Middle East tension largely contributed to this jump. President Donald Trump has officially informed Congress of renewed U.S. military operations against Iran, triggered after Iranian forces allegedly attacked neutral shipping in the Strait of Hormuz. He also ordered the reinstatement of a maritime blockade in the Strait of Hormuz and proposed a 20% transit toll for ships passing through the strategic chokepoint. Iran countered by launching missile attacks against regional states, including the United Arab Emirates and Bahrain.
Market participants are closely watching the upcoming U.S. consumer inflation reading for June, expected to signal a slight deceleration in price increases. Economists anticipate that cooling gas prices contributed to the moderation, offering some relief after May’s stronger inflation figures.
According to projections compiled by Bloomberg, analysts forecast a 0.1% month-over-month decline in the Consumer Price Index (CPI), with the annual pace of inflation rising 3.8%—a slowdown from the previous month, but still above Fed’s target of 2%. A fall in energy prices, tied to a recent ceasefire in the conflict involving Iran that has since fallen apart, played a significant role in the anticipated change.
When excluding food and energy, the core CPI is predicted to increase by 0.2% from May and by 2.8% compared to a year ago. Despite the broader softening in inflation, higher prices for travel and consumer electronics are expected to have bolstered underlying price pressures.
The U.S. Bureau of Labor Statistics is scheduled to release the official June CPI figures on Tuesday.
