Oil prices edged higher in Asian trading on Monday, buoyed by a weaker dollar as recent inflation data led traders to speculate that the Federal Reserve may cut interest rates by September.
Oil Gains Supported by Weaker Dollar but Limited by China Concerns
Brent oil futures for September delivery climbed 0.3% to $85.29 per barrel, while West Texas Intermediate (WTI) crude futures increased 0.4% to $81.84 per barrel by 21:10 ET (01:10 GMT). Both benchmarks had posted significant gains throughout June, driven by geopolitical tensions in the Middle East and Russia, which heightened fears of potential supply disruptions and added a risk premium to crude.
Impact of Weaker Dollar and Rate Speculation on Oil
The dollar index slipped approximately 0.2% in Asian trading, continuing its decline from Friday. This followed the release of the Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, which indicated a slight easing of inflation in May. This data fostered optimism about cooling inflation in the U.S., prompting traders to increase their bets on a 25 basis point rate cut in September, which in turn pressured the dollar.
A weaker dollar generally boosts oil demand by making it more affordable for international buyers and encouraging greater risk appetite among traders.
Focus on Federal Reserve Signals
This week, market participants are closely watching for signals from the Federal Reserve. Fed Chair Jerome Powell is scheduled to speak on Tuesday, and the minutes from the Fed’s June meeting will be released on Wednesday. Additionally, key nonfarm payrolls data, set to be published on Friday, will be pivotal as the labor market remains a critical factor for the Fed’s interest rate decisions.
Despite positive signs regarding interest rates, recent inventory data indicated that U.S. fuel demand remained tepid, even with increased travel during the summer season.
China’s Economic Activity Raises Concerns
Over the weekend, weak purchasing managers’ index (PMI) data from China heightened concerns about the world’s largest oil importer. Manufacturing activity in China contracted for the second consecutive month, and non-manufacturing activity also showed signs of softening. This PMI data has exacerbated worries that China’s economic growth is faltering despite recent stimulus measures, potentially impacting crude demand negatively.
These factors combined to create a mixed outlook for oil prices, as traders balanced the effects of a weaker dollar and potential Fed rate cuts against the uncertain economic situation in China.
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