The USD was subdued despite higher oil prices. Brent crude rose 2.8% to $111.26 per barrel overnight, driven by the UAE’s shock announcement to exit OPEC and the broader OPEC+ alliance on May 1. Although this was Brent’s first daily close above $110 since March 31, the DXY Index held a tight range of 98.2-98.9 in the past week. Looking past the geopolitical schism within the Gulf Cooperation Council, the UAE’s intention to increase production to 5 million barrels per day from its current quota of 3.4 million bpd could send oil prices tumbling if the US and Iran surprises with an off-ramp to end the twin blockade in the Strait of Hormuz on May 1, which is the 60-day deadline of Operation Epic Fury under the War Powers Resolution of 1973. If so, the focus could shift towards the next chapter of the Fed under President Donald Trump’s nominee, Kevin Warsh.
The US Treasury 10Y yield barely changed at 4.35%, near the top of this month’s range of 4.22-4.39%, ahead of today’s FOMC meeting. The futures market is not pricing in any Fed hike for the rest of 2026. The Senate Banking Committee will vote today to confirm Kevin Warsh as Fed Chair on May 15. The scepticism regarding Warsh’s willingness to hike rates before the November midterms is well-founded after his Senate Confirmation hearing. Warsh appeared to divert the current war-related energy shock by shifting the Fed’s focus away from core PCE inflation toward trimmed-mean inflation and AI productivity gains, alongside a barbell strategy of lower rates and balance-sheet reduction. His strategy is reminiscent of Alan Greenspan’s shift towards the Core PCE deflator, which ran lower than CPI, to justify a more accommodative stance during the productivity gains of the 1990s.
Jerome Powell will conduct his final press conference as Fed Chair following the expected decision to maintain the Fed Funds Rate at 3.50-3.75%. The calculus for Powell staying on as a Governor until January 2028 has shifted significantly with the Department of Justice’s decision on April 24 to drop its probe into the Fed's building renovations, moving Republican Senator Thom Tillis from blocking to endorsing Warsh on April 26. Tillis’ decision also signalled that the institutional threat had passed, making any decision by Powell to serve out his remaining term as Governor appear less a personal vindication than an institutional gridlock that US lawmakers want to avoid.
Given the convergence of these high-stakes geopolitical and institutional shifts, investors should brace for heightened volatility as the May 1 deadline approaches. USD will lose its haven premium should surprises point to a possible oil supply glut that supports the incoming Fed Chair’s paradigm shift.
Just thinking aloud.
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