The oil-price spike threatening to derail any lingering hopes for Federal Reserve rate cuts this year has arrived with a vengeance. Crude has surged past $110 per barrel, with physical benchmarks hitting above $140 in early April 2026. That's 2008 territory. Not good.
The culprit? Iran has fundamentally blocked the Strait of Hormuz, the chokepoint where 20% of global oil supply flows through. Now they're talking about introducing tolls for ships. Because why not add insult to injury?
Markets have gotten the memo. Fed funds futures are trading around 3.4%, and expectations have completely flipped. At the start of 2026, traders were anticipating at least one rate cut. Now? The most likely next move is a rate hike. December futures suggest the median dot projection could climb to 3.6%, meaning zero cuts this year.
Oil and Fed funds futures have moved in lockstep for months now. High oil prices equal no rate cuts. Simple math.
Goldman Sachs is trying to stay optimistic. Chief US Economist David Mericle says rate cuts are still possible in 2026, just delayed. The firm expects cuts in September and December, pushing the Fed funds rate toward a neutral range of 3% to 3.25%. Maybe. If everything goes perfectly.
The Fed is stuck. Higher oil prices are pushing inflation up while simultaneously dragging down economic growth. It's the worst combination imaginable. Rising inflation typically weakens a currency's value in foreign exchange markets, adding another layer of pressure on the dollar as traders reassess Fed policy. Historically, the central bank has tried to look past temporary energy shocks and focus on long-term trends. But how temporary is this?
One Fed official captured the mood perfectly: elevated oil prices put the central bank in a “wait-and-see attitude.” Markets hate that. They want clarity, direction, something to trade on.
Even if the conflict resolves tomorrow, energy prices will likely stay elevated. Oil infrastructure has taken damage, and nobody knows when normal cargo movement through the strait will resume. The supply chain disruption isn't ending anytime soon. Geopolitical tensions like these are among the most powerful drivers of forex volatility, as currency traders scramble to reposition amid shifting central bank expectations.
Markets are now pricing in one measly 25-basis-point cut this year and another next year. That's a massive retreat from earlier expectations. Companies looking to hedge currency exposure are finding the cost of hedging has increased as basis swap spreads widen amid the uncertainty. Rate-cut hopes? Meet reality.
