The Morning Update

The USD holds gains, oil prices weaken, equity markets rebound, and US yields ease as Middle East escalation fuels inflation fears. The U.S dollar is holding near its strongest levels of 2026, supported by escalating Middle East tensions and ongoing concerns that higher energy costs could keep U.S. inflation elevated. Markets expect the Federal Reserve to leave interest rates unchanged next week, but investors continue to price in a growing risk of a rate hike later this year, while geopolitical uncertainty underpins safe-haven demand for the dollar. Global equities steadied after Thursday’s selloff, with U.S. futures and European markets edging higher as Brent slipped below $100 and bond yields eased from 2026 highs. Risk appetite remains subdued ahead of the weekend, however, as investors weigh escalating Middle East tensions, renewed inflation concerns and a heavy week of major technology earnings. Elsewhere, oil prices are retreating after this week's sharp rally, while gold and bitcoin are holding relatively steady as investors continue to assess developments in the Middle East and the outlook for U.S. interest rates. In focus today, the US Global Manufacturing & Services PMI, New Home Sales and comments from EBC's Lane will help provide direction to the markets.

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New Headlines. The US hits 60 countries with new duties as Trump rebuilds tariff wall. Oil falls back below $100 as Trump weighs 'massive attack'. Intel posts fastest growth in 15 years as AI data centres demand fuels sales. Russian online retailer Wildberries becomes target for Ukraine's drones. The UK says armed forces ready to defend country after Iran warning over US bombers. Canada to market Gordie Howe bridge opening without US after trade war deepens. World stocks head for weekly fall, yields at multi-decade highs as oil fuels inflation fears. Gulf states set for debt binge to build routes avoiding Hormuz.

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In currency markets. Against the USD, currency markets remain under pressure as the greenback heads for its strongest weekly performance in a month, trading close to its highest levels of 2026. Safe-haven demand has been fuelled by escalating Middle East tensions and ongoing concerns that higher energy costs could keep U.S. inflation elevated, while investors await next week's Federal Reserve policy decision.

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In commodity markets. WTI -2.78% | Nat Gas -0.96% | Gold +0.33% | Silver +1.29% | Copper +0.28% | Palladium -0.50% | Coffee +0.31% | Cocoa -0.19% | Soybeans +0.46% | Wheat +1.18%

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CAD edged higher after yesterday's stronger-than-expected retail sales data reinforced signs of improving domestic demand. Oil prices have eased in early trading but remain on track for strong weekly gains, while firm commodity prices continue to provide underlying support for the loonie. However, uncertainty surrounding U.S. tariffs and the prospect of higher U.S. interest rates remain the principal headwinds. Investor sentiment also remains cautious, with speculative positioning showing the Canadian dollar is now the most heavily shorted major currency according to the latest CFTC data.

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EURCAD held steady in early trading as stronger-than-expected Eurozone business activity and the ECB's hawkish policy stance continued to underpin the euro. At the same time, resilient Canadian retail sales and firm commodity prices supported the Canadian dollar, leaving the cross broadly range-bound as investors weighed prospects for further ECB tightening against ongoing uncertainty over U.S. tariffs and higher U.S. interest rates.

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EUR held firm near 1.1400 after stronger-than-expected German and Eurozone PMI data pointed to improving business activity, reinforcing expectations that the ECB will maintain a relatively hawkish policy stance. However, gains remain capped by heightened geopolitical tensions in the Middle East, renewed U.S. tariff concerns, and a resilient U.S. dollar ahead of this afternoon's U.S. PMI data.

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GBPEUR holds steady in early trading as stronger-than-expected Eurozone and UK PMI data reinforced signs of improving economic activity on both sides of the Channel. However, ongoing geopolitical tensions in the Middle East, higher energy prices and renewed U.S. tariff concerns continued to dampen risk appetite, limiting movement in the cross.

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GBP inches higher after stronger-than-expected UK retail sales and PMI data reinforced expectations that the Bank of England will keep interest rates unchanged at next week's meeting while maintaining a relatively hawkish stance. However, upside remains limited as heightened tensions in the Middle East, renewed U.S. tariff concerns and broad U.S. dollar strength continue to weigh on market sentiment ahead of this afternoon's U.S. PMI data.

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