USD: Inflation shock risk from Hormuz blockade – MUFG

MUFG’s Derek Halpenny argues that the ongoing United States (US) blockade in the Strait of Hormuz is building a significant inflation shock for the US and globally, with Oil and input costs surging. He notes that President Trump’s strategy of squeezing Iran’s energy revenues is time‑consuming and politically costly, and expects rising inflation and global central bank responses to increasingly shape US Dollar performance.

Blockade-driven price pressures and policy risk

"The US blockade in the Strait of Hormuz continues with little sign of any progress toward another round of peace talks. President Trump has ordered the US navy to shoot at any boat laying mines while the US military stated that it had intercepted two oil supertankers that had tried to evade the blockade. The focus now is fully on the Strait of Hormuz and pressuring Iran into shifting its position."

"However, Iran knows there is a time limit for the US as well and the inflationary impact of the closure will have a US and global impact that will be damaging for President Trump. The risk must be that Iran’s tolerance for pain will be considerable and in that regard this stalemate could drag on to the extent that crude oil prices soon hit new highs and create greater financial market volatility."

"So this remains an issue of time and if President Trump’s strategy is to squeeze Iran dry of energy revenues, then time will be required, which we would argue President Trump doesn’t have. These prices are likely to get worse over the coming weeks if the Strait of Hormuz remains closed – our assumption based on crude oil prices average USD 115pbl in Q2 would see annual inflation pick up to around 3.6% in Q2 to 3.8% in Q3 and Q4 this year. The impact on refined fuels and fertiliser prices could mean these estimates are too low."

"This will have implications for inflation globally too of course and for Europe we maintain that the ECB and BoE will be quicker to act than the Federal Reserve which will continue to weigh on US dollar performance, especially under circumstances of equity market resilience continuing"

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)