Crude oil prices rose sharply on Tuesday after the People’s Bank of China announced a surprise rate cut, and the dollar weakened after data showing a slowdown in U.S. inflation raised expectations the Fed will pause rate increases.
Data from the Labor Department showed the consumer price index inched up by 0.1% in May after climbing by 0.4% in April. Economists had expected prices to tick up by 0.2%.
Core consumer prices rose by 0.4% in May, matching the increase seen in each of the two previous months as well as economist estimates.
The Labor Department also said the annual rate of consumer price growth slowed to 4% in May from 4.9% in April. The annual rate of core consumer price growth also slowed to 5.3% in May from 5.5% in April, in line with expectations.
Following the release of the report, CME Group’s FedWatch Tool is indicating a 91.9% chance the Fed leaves interest rates unchanged.
The dollar index dropped to 103.05 soon after the release of the inflation data this morning. Despite recovering to 103.37, the index remains in negative territory, losing about 0.27%.
“The disinflation process remains intact and that could mean the dollar’s days are numbered, which would provide some support for oil prices,” says Edward Moya, Senior Market Analyst at OANDA.
“In addition to China’s stimulus, energy traders are anticipating the impact from the Saudi oil price cuts to take tighten the market quickly next month,” adds Moya.
West Texas Intermediate Crude oil futures for July ended higher by $2.30 or about 3.4% at $69.42 a barrel.
Brent crude futures were up $2.21 or 3.1% at $74.05 a barrel a little while ago.
The People’s Bank of China unexpectedly reduced its short-term borrowing rate and authorities are expected to add more stimulus in the days ahead by way of a cut to the benchmark lending rate as several economic indicators have revealed a sagging economy after the post-pandemic reopening turned out to be quite tepid.
The PBoC cut the seven-day reverse repo rate to 1.9% from 2%. This was the first lowering since a similar size reduction in August last year.
The reverse repo is the rate at which the central bank gives short-term liquidity to banks. The latest reduction injected CNY 2 billion, or $279.97 million, through seven-day repos.
The central bank move, coupled with interest rate reductions by the country’s big banks over the past few days, signal more monetary policy easing in the days ahead.
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