From Rate Cuts to Rate Hikes — How Oil Flipped Monetary Policy

At the start of this year, markets were pricing in rate cuts. Now the conversation has shifted to rate hikes. At the center of this 180-degree reversal sits one thing: oil.

TL;DR Oil at $97 WTI is forcing central banks globally to reconsider monetary policy. The RBA has already hiked citing Iran-related oil risks. The Fed may follow if inflation reaccelerates. Dollar at near 1-year highs. Bitcoin back below $70K. The rate cut trade is dead — for now.

Oil Is the Inflation Detonator

Why oil matters this much comes down to its pervasiveness.

Crude feeds into transportation costs, manufacturing inputs, heating, food production — virtually every component of the price index. With WTI showing no signs of retreating from $97, central banks face an increasingly uncomfortable reality: they may need to raise rates, not cut them.

The shift has already begun. The Reserve Bank of Australia hiked rates and explicitly cited the Iran conflict's impact on oil prices as a contributing factor. The Bank of England and Bank of Canada have both flagged oil as a potential risk in recent statements.

At the start of the year, markets expected multiple rate cuts. Now they're pricing in the increased probability of rate hikes. This isn't a minor recalibration — it's a paradigm shift.

The 10-Year Yield Tells the Story

The US 10-year Treasury yield trend is unmistakable: it's heading up.

Friday saw yields give back slightly as bonds caught a safe-haven bid. But within the bigger picture, the upward trajectory in yields hasn't changed. The longer oil stays at these levels, the more entrenched the sticky inflation problem becomes.

This isn't just an American problem. It's global. Every country that settles energy imports in dollars faces a dual squeeze: rising oil prices and a strengthening dollar simultaneously.

The Dollar's Chain Reaction

The Dollar Index sits at 99.94 — hovering near a one-year high.

Dollar strength ripples through markets in multiple ways: it increases emerging market debt burdens, compresses US exporter earnings, adds upward pressure on commodity prices, and narrows policy room for other central banks.

The Bank of Japan deserves special attention here. With USD/JPY trending toward 160, the BOJ has resumed posturing for possible currency intervention. They've intervened near this level before. The Middle East situation has pushed this story to the back burner, but yen weakness remains a serious problem for Tokyo.

The euro is holding relatively steady against the dollar, but the British pound has been notably weak. The entire FX landscape is reflecting dollar dominance.

Bitcoin and Software Stocks — Risk Assets Under Pressure

Bitcoin broke back below $70,000 and is trading around $66,300.

The broader risk asset complex is under siege. Rate hike expectations, dollar strength, and geopolitical uncertainty — these three forces are simultaneously crushing risk appetite.

Software stocks are back under heavy selling pressure too. Recent court pushback against the White House's alleged targeting of Anthropic caused a brief bounce in software names. Now that the regulatory overhang is returning to uncertainty, those gains are reversing. Combined with everything else, the 2026 market environment has deteriorated significantly from where we started the year.

What Investors Need to Recalculate

Forget rate cuts. At least in the near term.

Unless oil convincingly breaks below $90, central banks are likely to maintain or tighten their hawkish stance. If your portfolio is overweight rate-cut beneficiaries, it's time to revisit that assumption.

Bonds offer short-term safe-haven utility, but holding long-duration bonds in a rising yield environment carries significant risk. A defensive posture focused on the short end of the curve is the pragmatic approach right now.