Oil surges on Iran strikes; hawkish Fed remarks push dollar, yields and rate-hike odds higher

A hawkish repricing at the Federal Reserve is colliding with a fresh escalation in the Gulf. These two forces typically push risk assets and the dollar in opposite ways, but for now they have fought to a standstill in equities and gold, while bond yields and the dollar clearly rise.

Fed Chair Kevin Warsh's hawkish tone from his Jackson Hole speech on Friday, reinforced by confident remarks at the G20 on Monday, stands in contrast to the view expressed by Treasury Secretary Scott Bessent on the same day. Bessent argued that the Fed traditionally refrains from raising rates during a supply shock. This tension merits attention because Warsh's rhetoric has hardened since then rather than softened. The Australian dollar is caught between a stronger greenback and a hawkish Fed on one side, and an oil rally that supports commodity currencies on the other. The next clear tests will be today's Caixin PMI data and Friday's US jobs report.

--- A hawkish Federal Reserve and renewed Gulf tensions are exerting opposing pulls on markets, and as of now neither side has gained the upper hand.

Key points:

• Oil jumped after the US attacked Iranian rocket launchers on Larak Island, which were reportedly being prepared to mine the Strait of Hormuz. Iran claimed it carried out retaliatory strikes on US bases in Jordan. Brent crude broke above 90 dollars a barrel and WTI rose above 86. However, reports indicate 6 to 8 million barrels a day are still transiting Hormuz.
• Fed Chair Kevin Warsh followed up his hawkish Jackson Hole speech with confident G20 remarks on Monday, stating that secular stagnation is now a thing of the past. September rate-hike odds have climbed to about 57 percent, up from roughly 40 percent a week ago. The 10-year Treasury yield has risen to around 4.7 percent on three consecutive days.
• This adds a complication to the argument made by Treasury Secretary Bessent in his same-day remarks, where he said the Fed usually avoids raising rates during a supply shock. Warsh's comments appear more hawkish than that view would suggest.
• The US dollar gained as rate-hike expectations rose, with USD/JPY briefly pushing above 160. The Australian dollar is torn between the stronger greenback and support from the oil rally given its status as a commodity currency. Traders are watching 0.715 as a potential support level.
• US stock markets fell on Monday, with the S&P 500, Nasdaq and Dow each losing 0.1% to 0.7%. Goldman Sachs and Alphabet were among the biggest drags. Despite the day's decline, all three indices posted gains for August, with the Dow notching its fifth consecutive monthly rise.
• Gold dropped sharply on Friday due to Warsh's hawkish comments and a stronger dollar, but steadied on Monday. The risk premium from the oil rally offset some of the pressure from higher rates. Silver lagged gold in the same move.

Markets are contending with two opposing forces: a more hawkish Federal Reserve and renewed Gulf tensions. As of Monday's close, neither had clearly won out.

Oil was the main mover. Brent crude rose above 90 dollars a barrel and WTI topped 86 after US forces attacked Iranian rocket launchers on Larak Island that were reportedly being readied to mine the Strait of Hormuz. This was the first such exchange in about a month. Iran said it launched retaliatory strikes on US bases in Jordan and separately claimed that a supertanker hit two mines while trying to cross the southern route of Hormuz, though this has not been independently verified. Despite the escalation, reports indicate that 6 to 8 million barrels a day are still transiting the strait, primarily from other Gulf producers, so the physical disruption to supply remains modest compared to the headline risk. Oil is up about 2 percent for August, on top of a 22 percent jump in July.

On the policy front, Fed Chair Kevin Warsh reinforced his hawkish stance from Jackson Hole with brief but confident comments at the G20 on Monday, saying that secular stagnation now appears to be a thing of the past. In response, traders pushed September rate-hike probabilities, tracked by the CME FedWatch tool, to around 57 percent, sharply higher than the roughly 40 percent a week earlier. The 10-year Treasury yield climbed to about 4.7 percent for a third consecutive day. This move is somewhat at odds with the view Treasury Secretary Scott Bessent presented in a CNBC interview the same day. Bessent argued that the Fed traditionally avoids raising rates into a supply shock without second- or third-order inflation effects. Warsh's tone, both at Jackson Hole and the G20, has hardened rather than softened since Bessent spoke, a divergence that will be important as the September meeting draws nearer.

The higher probability of a rate hike boosted the US dollar. USD/JPY briefly traded above 160 as the gap widened between a hawkish Fed and a Bank of Japan seen as slow to act, despite Tokyo's roughly 96 billion dollar intervention disclosed last week. The Australian dollar is torn between two opposing forces: a stronger US dollar and hawkish Fed on one side, and the oil rally supporting it as a commodity currency on the other. The level 0.715 is seen as a key support if the dollar side prevails.

US equities declined on Monday. The S&P 500, Nasdaq and Dow each fell by roughly 0.1% to 0.7%, partly due to weakness in Goldman Sachs and Alphabet. Nevertheless, all three indices finished August with gains, giving the Dow its fifth straight monthly rise. Gold, which dropped sharply on Friday after Warsh's hawkish inflation warning and the resulting dollar strength, stabilized on Monday as the risk premium from the oil rally offset some rate-driven pressure. Silver underperformed gold on the same move. With China's Caixin PMI data due today and the US jobs report on Friday, both will be key tests of whether the hawkish Fed narrative or the geopolitical risk narrative will dominate market direction.