MUFG’s Lloyd Chan notes that higher US 2-year yields and elevated Brent prices are supporting broader USD strength, with markets now fully pricing one Fed rate hike by January 2027. The report highlights rising US inflation expectations, record-low consumer sentiment and the risk that a potential US–Iran deal could trigger a sharp USD reversal if geopolitical tensions ease.

USD strength faces geopolitical risk

“US 2-year yields have continued to grind higher, with markets now fully pricing in one Fed rate hike by January 2027. US average gasoline prices remain elevated, staying above $5 per gallon. The University of Michigan’s May survey showed long-term inflation expectations rising to 3.9% from 3.5% in April, while consumer sentiment fell to a record low.”

“Positioning-wise, long USD exposure picked up modestly over the past week, though it is not yet stretched. Focus shifts to communication from the new Fed Chair, Kevin Warsh, as markets assess how he will navigate a backdrop of rising inflation risks, weakening consumer confidence, and elevated US government debt.”

“On the geopolitical front, Trump has announced that a deal with Iran has been largely negotiated. Gulf nations, including the UAE, Saudi Arabia, and Qatar, continue to advocate for a diplomatic resolution and warn against further escalation. For now, momentum remains with USD strength, supported by yields and macro resilience. However, positioning remains vulnerable to a sharp reversal should geopolitical risks ease sharply.”

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