Morgan Stanley Expects Fed to Delay Rate Cuts Amid Oil Shock - FXLeaders

Morgan Stanley delays Fed cut call to 2027 (more info). Middle East risk drives dollar

The desk interprets Morgan Stanley's recent shift in Fed cut expectations as a significant indicator of the evolving monetary landscape, particularly in light of persistent inflation and geopolitical tensions. Per the full note, Morgan Stanley has delayed its forecast for rate cuts to early 2027, reflecting a hawkish drift within the FOMC and a terminal rate projection of 3.0-3.25%. This adjustment comes as the market prices an 83.6% probability of no Fed rate changes through year-end, a notable increase from the previous week's 75.9%. The desk believes that the euro's recent decoupling from traditional rate differentials, driven by Middle Eastern geopolitical risks, underscores the dollar's current safe-haven appeal, with potential upside for the euro contingent on de-escalation in the region.

Goldman Sachs Now Expects Fed Cut in December - FXLeaders

Iran oil shock has put Fed rate cuts off the table and hikes back on, Pimco says

The desk interprets Pimco's recent commentary as a significant shift in the Fed's interest rate outlook, suggesting that the ongoing energy shock from the Iran conflict may necessitate rate hikes rather than cuts. Per the full note [source], Pimco's CIO Dan Ivascyn emphasized that the inflationary pressures from rising energy prices could render rate cuts counterproductive, a sentiment echoed by Franklin Templeton's CEO Jenny Johnson. This perspective is reinforced by the Fed's preferred inflation measure, which hit 3.5% in March, its highest in nearly three years, indicating that the central bank's monetary policy calculus is becoming increasingly complex. The recent rise in the two-year Treasury yield by approximately 50 basis points since the onset of the conflict further underscores tightening financial conditions that could dampen demand and influence the Fed's decision-making process.

Watch: How two-way risks are dividing the Fed’s policy outlook

The desk believes that the Federal Reserve's current indecision on interest rate direction stems from geopolitical factors, particularly the potential reopening of the Strait of Hormuz, which could influence oil prices and economic stability. Per the full note from ING, James Knightley suggests that if oil flows resume, the likelihood of rate cuts increases, overshadowing the prospect of hikes. This perspective aligns with a broader market sentiment that anticipates a dovish Fed stance amid fluctuating global energy dynamics. With no high-impact events on the calendar in the next 30 days, traders should remain vigilant to geopolitical developments that could shift the Fed's policy outlook.