With the Fighting Paused but Inflation Still Sticky

Introduction

The market's attention is currently dominated by the tug-of-war between geopolitical developments in the Middle East and persistent U.S. inflationary pressure.

This brings us to the key theme driving markets today:

“Higher for Longer” in an Era of Sticky InflationI. The Federal Reserve's High-Rate Dilemma

With interest rates remaining in the 3.5%–3.75% range, the economy is operating more like it is inside a prolonged high-pressure chamber.

The market is no longer dealing with the one-off shock of another rate hike. Instead, businesses and investors are facing the persistent pressure created by borrowing costs remaining elevated for an extended period.

Where Are the Real Pain Points for Markets and Businesses？

1. Financing Costs Remain Elevated

2. Investment Plans Are Being Delayed

3. Inflation Expectations Remain Difficult to Eliminate

II. Why Is the Market Focused on the Tug-of-War Between High Rates and Inflation？

The macro triggers behind this shift are relatively clear:

A temporary ceasefire in the U.S.–Iran conflict

Oil prices retreating from around $100 to approximately $91

The upcoming Core PCE inflation report on Thursday

The market currently expects annual Core PCE inflation to reach around 3.3%, significantly above the Federal Reserves long-term 2% inflation target.

Together, these factors are changing market psychology.

Previously, investors were asking:

“When will the Federal Reserve start cutting rates？”

Now, the question is increasingly becoming:

“If PCE inflation remains stubbornly high, could the Federal Reserve eventually be forced to raise rates again？”

The market is even beginning to consider whether the probability of renewed tightening could increase if inflation remains persistently elevated.

This shift in expectations is reshaping global asset-pricing dynamics:

Rates stay high → Capital continues flowing toward U.S. dollar assets

Inflation remains sticky → Long-term Treasury yields struggle to decline

Geopolitical conflict returns → Oil regains its geopolitical risk premium

Policy expectations become less certain → Volatility in equities and risk assets increases

III. What Does This Mean for the U.S. Dollar？

Under a Higher for Longer environment, the U.S. dollar is clearly one of the major beneficiaries.

The dollar currently has two important defensive advantages:

First, a relative interest-rate advantage

Second, geopolitical safe-haven demand

Even if Federal Reserve Chair Kevin Warsh is not inclined to tighten policy immediately, as long as inflation remains above target, markets will find it difficult to completely rule out the possibility that interest rates will stay elevated for longer.

This also highlights a common market misconception:

“For the dollar to keep rising, the U.S. economy must continuously produce new and stronger economic data.”

That is not necessarily the case.

The dollar does not always need fresh bullish catalysts to remain strong.

As long as expectations for rate cuts fail to build significantly, and the existing high-rate narrative remains intact, elevated U.S. yields alone can continue to provide meaningful support for the currency.

IV. What Does This Mean for Oil and Equities？

Oil and other risk assets are currently caught in an intense tug-of-war.

For crude oil, the market is simultaneously trading two opposing narratives:

Red Sea and Middle East supply disruption risks → Increase the geopolitical risk premium in oil

At the same time:

High interest rates suppress global economic activity → Weaken expectations for future energy demand

As a result, oil prices could experience increasingly volatile swings within the key $90–$100 range.

If geopolitical tensions escalate again, crude oil could quickly retest the psychologically important $100 level.

However, if the ceasefire holds while high interest rates begin to weigh more heavily on global growth, the geopolitical risk premium embedded in oil prices could rapidly unwind.

V. What Would Risk Assets Need to Turn Stronger Again？

For equities and other risk assets to regain a more sustainable upward trend, several important conditions need to be monitored.

1. Inflation Must Show Genuine Cooling

2. Geopolitical Tensions Need a Genuine Breakthrough

3. The Federal Reserve Needs to Rule Out Further Rate Hikes

ConclusionAs long as inflation refuses to return convincingly toward target, the Federal Reserve has little reason to cut rates aggressively. As long as rates remain high, the U.S. retains its relative interest-rate advantage.Disclaimer

This content is provided solely for general market information and reference purposes. It does not constitute investment advice, an offer, or a solicitation to buy or sell any financial instrument.

Financial markets involve risk. Investors should exercise caution and make independent decisions based on their own investment objectives, financial circumstances, and risk tolerance.