Brent: Diplomatic progress weighs on prices – OCBC

Strategists at OCBC Bank, Sim Moh Siong and Christopher Wong, have observed that enhanced shipping prospects through the Strait of Hormuz and diplomatic advances between Iran and Oman have eased supply worries, driving Brent crude prices below USD90 per barrel. The decline in energy prices has led to reduced US and European bond yields, with market attention now shifting towards US core PCE and Jackson Hole for insights into Federal Reserve inflation priorities.

Despite Washington's plans to intensify economic pressure on Iran, investors have largely dismissed these measures, with markets pricing in a potential diplomatic resolution. The US has avoided imposing secondary sanctions on entities trading with Iran, China included, resulting in a price drop for Brent crude as concerns about a wider Middle East conflict diminish.

Iran and Oman have released a joint plan to ensure safer shipping through the Strait of Hormuz following discussions in Tehran on Tuesday. A temporary shipping corridor and ongoing mine-clearing efforts are expected to significantly improve conventional tanker traffic through the strait. Additionally, Pakistan's Army Chief concluded a one-day visit to Iran, with local reports indicating constructive outcomes.

Recent reports suggest the US may reintroduce diplomats to embassies throughout the Middle East, signaling that Washington does not anticipate a sudden escalation in military action. The UK's currency, GBP/USD, has taken on a bearish stance below 1.3650 during Wednesday's European trading session, losing some of its earlier gains.

However, it remains close to a six-month high set last Friday, as traders eagerly await the release of the US Personal Consumption Expenditures (PCE) Price Index data for fresh guidance on the Fed's inflation priorities. EUR/USD is currently trading below 1.1650 in Wednesday's European session, with the US Dollar demonstrating a modest recovery due to profit-taking and uncertainty in the Middle East.

The PCE, tracking US inflation, along with a revision of Q2 GDP data, are anticipated to keep investors engaged on Wednesday. Gold prices are hovering close to modest losses below $4,650 as of the European session, although they lack a strong bearish outlook and remain within the previous day's trading range. The US Dollar is gaining strength due to some repositioning ahead of the US Personal Consumption Expenditures Price Index, potentially affecting the commodity negatively.

The "Everything Exchange" is gaining traction among institutional investors and users, with daily inflows surpassing $5 million in the past two days and generating daily revenue exceeding $2.75 million over the past week. The US Bureau of Economic Analysis is scheduled to release the Personal Consumption Expenditures (PCE) Price Index data for July on Wednesday, at 12:30 GMT.

This data is expected to reveal that inflation pressures remain elevated, surpassing the Federal Reserve's 2% target.