USD
Hopes of a diplomatic breakthrough in the Middle East set the tone on Monday. Iranian negotiators left Doha without a deal, but with a draft proposal to reopen the Strait of Hormuz circulating and Tehran confirming that exchanges with Washington continue, slumped close to 8% to settle just below $105, pulling the dollar lower. Overnight, however, reports of a US strike on Iran’s Qeshm Island have put some risk premium back into oil, partially reversing yesterday’s losses. Meanwhile, the RBA hiked 25bp to 4.85% but dropped its tightening bias, leaving fractionally lower this morning. Today brings the US midterms, with prediction markets heavily favouring a Democratic House, alongside JOLTS job openings and factory orders. Results will only land overnight, so with December Fed hike odds still above 70% and payrolls looming on Friday, we expect the greenback to hold its ground, with Gulf headlines the main source of volatility.
EUR
The euro posted its biggest intraday gain in over two weeks on Monday, climbing above 1.12 as oil tumbled and the dollar softened, only to fade back overnight. While oil and Middle East risk have been the primary drivers, the single currency also drew support from hawkish ECB commentary, with Kazimir arguing that the question is not whether further tightening is needed but how much. That is consistent with our view that a December hike remains the more likely outcome, although with markets already pricing most of it, we doubt it offers much lasting support. With no top-tier eurozone data today, attention turns to a raft of ECB commentary and tomorrow’s flash HICP, where consensus sits at 4.0%. Until then, we expect to trade on dollar and Middle East headlines, with risks tilted modestly lower in the near term.
GBP
Sterling gained against the dollar on Monday, closing higher just above 1.34, albeit with that move more a function of dollar weakness than improved UK fundamentals. Looking ahead, markets price a 25bp hike to 4.00% at Thursday’s MPC meeting as near certain, and we agree, expecting a 7-2 vote. The bigger question is the guidance. We expect a dovish tilt that signals a December pause, in keeping with recent MPC hints, which should cap sterling’s upside. Before then, there is little on the UK calendar today, leaving the pound to take its cue from oil and the Middle East, where a renewed slide in energy prices would ease the inflation argument for further BoE hikes. We look for to hold close to 1.34 ahead of Thursday, with a drift toward 1.33 the more likely direction thereafter.
CAD
The loonie struggled for direction to start the week, even as the dollar softened against other G10 currencies. A near 8% drop in crude on US-Iran peace hopes has removed a key prop for the currency, ultimately leaving trading little changed around 1.40 on Monday. Canada’s October manufacturing PMI, which slipped to 49.6, down from 51.5 previously, only added to the sense of an economy losing momentum after Friday’s soft GDP readings. We continue to think last week’s BoC hike to 2.50% looked premature, and with markets pricing roughly 45% odds of a December follow-up, there is room for Canadian rate expectations to fade. An overnight rebound in oil after the reported Qeshm Island strike offers the loonie some respite, but the domestic calendar is quiet today, and Friday’s labour force survey, where consensus looks for a 15k gain with unemployment at risk of rising to 6.6%, remains the key event. Set against US payrolls the same day, divergent outcomes could spark the USDCAD rebound we flagged in our week ahead, and we continue to see the pair drifting higher.
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