News & Analysis

CAD

The loonie was arguably the standout performer on Tuesday, climbing against the dollar, even as much of the G10 FX was in retreat on the escalating conflict in the Middle East. That said, this makes sense to us. Oil rallied close to 4% on the day, helping CAD, alongside NOK, to outperform. Whether or not the loonie can hold onto these gains will likely depend on how sticky this move higher for oil proves, which should keep USDCAD traders squarely focused on the Middle East today.

USD

While a readjustment higher for Fed rate expectations was the dominant theme early on Tuesday, headlines out of the Middle East saw markets rapidly turn their attention to escalation risk, propelling the dollar higher on a haven bid that saw the DXY index rise almost half a percent. Overnight, this culminated in a volley of ballistic missiles fired by Iran, at Israel. Although damage seems to have been minimal, indications this morning suggest that neither side is ready to step back from the brink, keeping both oil and the dollar supported through early trading.

That aside, we still think domestic US events are well worth keeping an eye on this week, especially given the rapid approach of Friday’s pivotal jobs numbers. Yesterday saw a mixed bag of data, with a rise in job openings offset by a soft set of ISM manufacturing prints and a slide in the quits rate. Today, it is ADP in focus, though given the measure’s lack of predictive strength over recent years, this is likely to take a back seat for many in markets. Instead, we think it is the four Fed speakers that will be worth keeping an eye on this afternoon, alongside geopolitical risks. Our bias continues to lean in favour of further dollar strength on both counts.

EUR

The euro traded under pressure on Tuesday, sliding 0.6% against the dollar, even as this proved to be a middle-of-the-pack performance amongst G10 FX. As with other currencies, events in the Middle East were front of mind for traders, a dynamic that arguably distracted from the key domestic release of the day, namely aggregate eurozone CPI readings. These showed that headline price growth softened to 1.8% YoY, down from 2.2% in August. While in line with market expectations, this leaves price growth tracking significantly below euro system staff projections. All told, we think this now sets the scene for an acceleration in ECB easing. We now expect a succession of 25bp rate cuts from the Governing Council through to mid-2025, a rate path that should weigh on the euro, if realised.

GBP

A blank data calendar should keep sterling traders focused elsewhere, with attention on the Middle East in particular. A similar dynamic yesterday saw sterling nudge modestly lower against the euro and slide 0.7% against the dollar. While this should mean that much of the escalation risk is now priced into markets, risks are for further signals that the conflict could widen, posing further downside risks for the pound today.

 

 

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