Middle East risk keeps oil and the buck supported

USD

The dollar gave back some ground on Friday, seeing the DXY slip toward 101 as reports of a possible phased US-Iran deal to reopen the Strait of Hormuz knocked Brent 2% lower, while the yen jumped after Tokyo said President Trump had raised concerns over its weakness. That oil reprieve has proved short-lived, however, putting the buck on the front foot to start the new week. Trump rejected Iran's seven-day truce plan over the weekend, and reports suggest he expects strikes to resume after November's midterms. That has lifted Brent to around $107 overnight, with the DXY back at 101.1 and 10-year yields holding near 5.2%. Today's Dallas Fed survey (15:30 BST) and scheduled Fedspeak should keep the focus on price pressures ahead of Wednesday's PCE data and Friday's payrolls. We look for a 60-80k print with unemployment steady at 4.1% as a baseline. That should be enough to reinforce our call for an October hike, now around 70% priced, and keep any dollar dips shallow, with month- and quarter-end flows also likely to muddy the waters over the coming days.

EUR

EURUSD edged higher on Friday to around as softer oil briefly eased pressure on the bloc's terms of trade. That said, domestic news was less encouraging, with Germany's GfK consumer climate index plunging to -30.6 for October, against -27.4 expected, as income expectations collapsed on fears that energy costs will erode purchasing power. With oil climbing again as hopes of a Hormuz deal faded over the weekend, the pair is marginally softer this morning, while attention now turns to President Lagarde's hearing before the European Parliament's economic committee in Brussels this afternoon. Following this month's hike to 2.50%, we expect the ECB to tread carefully in the near term, though another move before year-end remains possible. We doubt Lagarde will pre-commit either way. This week's national inflation prints, culminating in Friday's flash HICP where consensus expects a 3.7% headline figure, should keep that debate alive. Even so, we see the euro taking its lead from the dollar and energy markets, with immediate risks biased to the downside.

GBP

Sterling snapped a run of daily losses on Friday, with cable rising around 0.2%, helped by a notable shift in tone from BoE Governor Bailey, who warned that holding Bank Rate at 3.75% becomes harder the longer energy prices stay elevated. He added that the MPC cannot wait for conclusive evidence of second-round effects before acting. Deputy Governors Breeden and Lombardelli sent similar signals on Thursday, and markets now lean firmly towards a November hike. Absent a near-term resolution to the US-Iran conflict, and having read last week’s commentary, we now agree and are updating our house call to look for a November rate rise accordingly. Today, Deputy Governor Ramsden's 11:00 BST speech is in focus, with no data publications due, while Labour's conference and PM Burnham's keynote tomorrow keep fiscal risk in view ahead of the October 28th Budget.

CAD

The loonie failed to capitalise on Friday's broader dollar pullback, with USDCAD little changed close to two-month highs. A 2% drop in Brent on US-Iran deal hopes removed a key support, while widening rate differentials continued to weigh. Overnight, crude's rebound after the US rejected Tehran's plan to reopen the Strait of Hormuz has been matched by renewed safe-haven demand for the dollar, leaving USDCAD modestly higher through early trading. There is no domestic data today, and Trump has signalled that talks will continue this week. Oil headlines should therefore steer the loonie ahead of tomorrow's July GDP release (13:30 BST), where Statistics Canada's flash estimate points to stagnation after June's 0.3% gain. A soft print would add to evidence of a slowdown already visible in July retail sales and August job losses, as the trade war with Washington rumbles on. That supports our view that it is much too early to pencil in Bank of Canada tightening ahead of the October 28th decision, leaving USDCAD risks tilted towards 1.42.

Disclaimer

This information has been prepared by Monex International Markets plc, part of Monex S.A.P.I. de C.V. (“Monex”). The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. All entities in the “Monex” group of companies are regulated for different products and services within the jurisdictions in which they operate. Details of the different entities can be found here. Details of the respective entities’ regulated status and available products and services can then be found on the relevant links to the individual jurisdictions’ website.