The Kiwi started the week on a firmer footing, supported by encouragingdevelopments in the Middle East and the accompanying slide in Brentcrude, before selling off as a mild rebound in the USD DXY indexoutweighed the further pullback in oil prices amid easing regionaltensions. Domestically, data has been relatively limited so far this week.Middle East headlines have remained the dominant driver in markets sofar this week. Brent crude fell to as low as US$85/bbl after reports thatWashington and Tehran were working toward a renewed peace deal, withthe US holding off on strikes since Friday following thirteen consecutivenights of attacks and Iran signalling it would refrain from retaliation whileholding talks with Oman over the Strait of Hormuz. President Trump saidthe pause was intended to give negotiations a further chance. The sell off was compounded by the resumption of loading at theCaspian Pipeline Consortium terminal on Russia's Black Sea coast,following last week's drone attacks. Risks of disruption spreading furtherremain elevated however, with Saudi Arabia continuing to face challengesfrom Houthi attacks, while transits through the Strait of Hormuz remainlimited, again underscoring how fragile the improvement in sentimentremains.Looking ahead, market focus will turn to Thursday's FOMC meeting.While we don't expect a rate hike, markets are currently pricing around a40% probability of a rate rise. That said, we do expect the Fed'scommunications to lean firmly hawkish. The statement itself will likelystay brief, consistent with Chair Warsh's evident preference for avoidingexplicit forward guidance, but the broader messaging should signal tomarkets that hikes remain on the table should the conflict in Iran persistand oil prices hold around or above current levels for a sustained period.
