The dollar climbs again as Middle East concerns build
The DXY rose 0.4% to ~99.4 on Monday, as markets priced in a 25bp Fed hike following last week's hot core CPI print. Middle East tensions keeping oil above $100/bbl are stoking inflation fears, pushing 10-year Treasury yields above 5% for the first time since 2023. The euro and pound slipped on energy and labor pressures, while the loonie lagged despite stronger crude. Focus now turns to U.S. retail sales, the German ZEW survey, and rate decisions from the Fed, ECB, and BoJ.
USD
The dollar firmed across the board on Monday, with the DXY rising around 0.4% to trade near 99.4 as markets moved to price in a near-certain 25bp hike at tomorrow's Fed decision, in line with our revised house call after last week's hot core CPI print of 0.3% MoM. Indeed, escalation in the Middle East, which has kept oil comfortably above $100 per barrel, continues to feed inflation anxiety, pushing ten-year Treasury yields above 5% for the first time since 2023. Today's calendar is light, with only the Empire State manufacturing index of note, expected to slip to 15 from 20.6. We look for consolidation ahead of tomorrow, when retail sales land just hours before the FOMC, where the dot plot and Chair Warsh's press conference are the key risk events.
EUR
The euro drifted lower against the resurgent dollar on Monday, with EURUSD slipping into the mid-1.15s, extending Friday's post-CPI losses. Meanwhile, Saudi Arabia's closure of the East-West pipeline after drone strikes launched from Iraq has compounded the supply hit from the closed Strait of Hormuz, keeping Brent near $108 and weighing on the eurozone's energy-importing economy. Today brings the bloc's main test of the week in the German ZEW survey, with sentiment expected to improve to 40 from 34.2 in August, alongside final French and Spanish inflation. Assuming no pullback in oil prices, we see EURUSD risks tilted lower ahead of tomorrow’s FOMC decision, despite market expectations for domestic data.
GBP
Sterling proved resilient on Monday, with GBPEUR capping out just shy of 1.17, leaving the pound well positioned into a heavy domestic week. This morning's labour market report kicks things off with unemployment stable at 4.9%, accompanied by earnings growth which fell a tenth more than expected after an upgrade to the June numbers. August CPI follows tomorrow and is likely to prove more consequential ahead of Thursday's Bank of England decision, where we look for a hold at 3.75% on a 6-3 vote. As we cautioned yesterday, with the Fed, ECB and BoJ all tightening this week while the BoE sits static, sterling looks vulnerable, particularly if Governor Bailey signals caution on future hikes. The soft wage print this morning reinforces that asymmetry, seeing the pound dip lower through early trading.
CAD
The loonie underperformed again on Monday, with USDCAD climbing a further 0.3% to trade around 1.39, shrugging off crude strength as WTI rose 1.7% to near $102 on the Saudi pipeline shutdown and the continued closure of the Strait of Hormuz. August CPI held steady at 3.0% YoY, in line with consensus. And, with core price measures similarly unchanged, inflation data is doing little to force the Bank of Canada's hand in October after holding at 2.25% earlier this month. The domestic calendar is quiet today, leaving the loonie to trade off oil headlines and pre-Fed positioning. A hawkish Fed hike tomorrow, unmatched by BoC repricing, skews USDCAD risks toward the 1.40 handle.