The dollar slips back on Middle East optimism
The dollar slipped as Middle East optimism lifted risk appetite and weighed on oil prices, while markets turn to US CPI for the next key test.
USD
The dollar gave back much of Friday’s post-payrolls gain yesterday, with the DXY falling 0.6% to 101.7 as risk appetite returned. Equities recovered most of last week’s AI-led losses, with the S&P 500 closing up 2.4%, while Brent fell to below $93. The catalyst was the Middle East, where President Trump said renewed strikes on Iran were “highly unlikely” while talks progress, and Qatar’s prime minister brought an Iranian proposal to the White House that would reopen Hormuz. For now, we remain cautious, having seen prior bouts of optimism give way to renewed hostilities, with markets burned by premature optimism. US-Iran tensions aside, today’s October CPI is the other key market test, with consensus at 0.3% headline and 0.2% core. As we argued in our week ahead, we see risks tilted modestly to the upside and would not bet against the buck just yet.
EUR
EURUSD rose back above 1.12 yesterday, fully reversing Friday’s payrolls-driven slide and returning to levels seen before the US jobs report. The move owed little to the eurozone itself. The single currency is a prime beneficiary of lower energy prices given the bloc’s import dependence, so Monday’s slump in crude on hopes of a US-Iran deal, combined with a broad unwind of haven dollar demand, did most of the hard work. Today brings another thin eurozone calendar, with speeches from Cipollone, Lane and Escrivá the only scheduled events, leaving US CPI as the dominant driver. Combined with a fluid Middle East situation, this backdrop leaves us inclined to fade EURUSD strength, looking for the pair to drift back below 1.12 near term.
GBP
Monday also saw plenty of GBPUSD upside, though sterling lagged the euro slightly with EURGBP edging higher. The pound benefited from the equity rebound and oil’s slide, a mirror image of its underperformance during last Thursday’s sell-off. Today’s calendar is light, with the BRC retail sales monitor released overnight and Lombardelli and Pill speaking at 12:30 and 18:30 GMT, respectively. Both signalled last week that one hike is unlikely to be enough, so any firming of that message would support the pound ahead of Thursday’s Q3 GDP print, where consensus looks for 0.7% growth. Our BoE base case remains one more hike to 4.25% on December 17th followed by an extended pause, with Bank Rate peaking below swap pricing. Near term, though, US CPI matters more, and a firm print would weigh on cable this afternoon.
CAD
The loonie was left behind yesterday, with USDCAD trading around 1.41, leaving the Canadian dollar flat against a broadly weaker greenback. Oil’s 6% drop on US-Iran deal hopes removed the loonie’s usual tailwind just as Friday’s soft Labour Force Survey, which showed a third consecutive monthly employment fall and unemployment up to 6.7%, is still weighing on the rates outlook. Indeed, markets now price only a 35-40% chance of a Bank of Canada hike on December 9th against around 80% for the Fed. That gap could widen further today, with this afternoon seeing the BoC’s October summary of deliberations published, which should shed light on how the Governing Council weighs the energy shock against softening labour conditions. Elsewhere, US CPI is the main event, with a return to 1.42 possible for USDCAD if the data lands hotter than anticipated.