Rupiah Under Pressure on Oil and Policy Risks

Key Moments

Rupiah Strains as Oil Imports Hit Trade Position

USD/IDR was firmer around 18,100 in Asian trading on Thursday, recovering after falling for two consecutive sessions. The pair has been supported as the Indonesian Rupiah (IDR) comes under renewed pressure from sharply higher oil import costs, which are stretching the country’s trade balance and adding to inflationary strains.

The deteriorating trade and price backdrop has sharpened attention on Bank Indonesia’s (BI) policy decision scheduled for next week. Market participants are weighing whether the central bank might deliver additional rate increases to stabilize the currency, following a cumulative 100 basis points of tightening implemented in May-June.

Authorities are leaning on both monetary and fiscal measures. While BI’s defensive stance and planned government actions aimed at limiting food and industrial price increases provide some cushioning, the Rupiah remains exposed to wider risk-off moves in global markets.

Rising Geopolitical Tensions Support the Dollar

The US Dollar (USD) has recovered recent daily losses amid a pickup in risk aversion. Investors have linked the shift in sentiment to mounting tensions between the United States and Iran, which have pushed oil prices higher and reignited worries about inflation. This geopolitical backdrop risks extending the period of elevated interest rates from the Federal Reserve (Fed).

Traders are reassessing the Fed’s path in light of softer US price data. On Tuesday, the US Consumer Price Index (CPI) eased to 3.5% in June from a three-year high of 4.2% recorded in May, and came in below the consensus forecast of 3.8%. The weaker inflation print initially tempered expectations that the Fed would move quickly to raise interest rates.

Fed Rate Expectations Reprice, but Geopolitics Cloud Outlook

Data from the CME FedWatch Tool indicate that markets have reduced the perceived likelihood of a September Fed hike, with the implied probability slipping to about 44% from 50% the previous day. However, the inflation report does not yet incorporate the potential economic fallout from the latest military escalation between the US and Iran.

The article notes that the interim US-Iran peace agreement reached last month has effectively collapsed, and therefore June’s inflation figures do not reflect the impact of this renewed conflict on energy prices and broader cost pressures.

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