I've been following an interesting dynamic in the foreign exchange market lately. The rise in oil prices is significantly changing the game for expectations about Federal Reserve rate cuts this year.

Basically, what’s happening is that this inflationary pressure coming from oil has caused traders to recalibrate their bets. A week ago, they were pricing in about 61 basis points in cuts, now it’s down to 59 basis points. It may seem small, but it shows how nervous the market is about inflation.

The result? The US dollar is strengthening quite a bit against major currencies. And it makes sense because when risk aversion increases, everyone rushes to the safe haven, which is the US dollar itself.

What intensified all this was the situation with the Iranians refusing talks with the US. That triggered a strong risk sentiment in the market — US stock futures fell, and consequently, demand for the dollar rose even more.

Basically, we’re seeing a scenario where oil inflation is making the Fed think twice before making aggressive cuts, and meanwhile, the US dollar is benefiting from this geopolitical uncertainty. It’s worth keeping an eye on this dynamic in the coming days.