The Morning Update

The USD advances, oil prices rally, equity markets fall, and US yields are mixed amid Fed expectations, Middle East concerns, and an AI CEO warning. The USD strengthened to a two-week high as escalating Middle East tensions boosted safe-haven demand and markets increased expectations for a Federal Reserve rate hike on Wednesday, while higher oil prices reinforced inflation concerns and the case for tighter policy. Global equity markets fell, led by technology shares, after warnings from several leading AI CEOs about the risks of rapid AI development added to concerns about the sustainability of the recent tech rally. Investors also remain focused on this week’s Fed decision for guidance on the policy outlook. Elsewhere, oil prices at one point rallied more than 3% on renewed Middle East supply concerns, while gold weakened and bitcoin firmed modestly. Today’s economic calendar includes Canadian CPI inflation, including the BoC’s core inflation measures, Canadian manufacturing sales and capacity utilization, alongside a speech from ECB President Christine Lagarde. The primary focus this week remains Wednesday’s Federal Reserve interest-rate decision and Fed Chair Kevin Warsh’s press conference.

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News Headlines. Stocks rattled by AI CEO warnings; oil and bonds add to the gloom. Oil hits $108 as Gulf states postpone talks with Iran over Hormuz. China's spy agency warns of AI risk to national security. European capitals barter over Christine Lagarde's successor at the ECB. The Swedish election on a knife-edge. Canada seeks a role in Ukraine loans to deepen EU ties. Japan's central bank set for pivotal moment on rates. Trump rejects calls from tech bosses for AI slowdown. Russia strikes Ukraine train line moments after foreign dignitaries pass. Mark Carney said no to Donald Trump and now must contend with the economic fallout.

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In currency markets. Against the USD, major currencies traded lower in early trading as the greenback strengthened on rising expectations for a Federal Reserve rate hike on Wednesday and renewed safe-haven demand. JPY was the notable underperformer, giving back some of last week’s gains despite markets being almost fully priced for a Bank of Japan hike on Friday, while EUR and GBP also eased as global bond yields remained elevated. Central-bank policy remains the key focus this week, with the Fed, BoE and BoJ all meeting following last week’s ECB rate hike.

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In commodity markets. WTI +2.42% | Nat Gas +2.58% | Gold -1.87% | Silver -3.33% | Copper -1.94% | Palladium -2.64% | Coffee -0.32% | Cocoa -0.67% | Soybeans -0.06% | Wheat +0.24%

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CAD has weakened toward two-week lows against the U.S. dollar as stronger U.S. inflation data reinforced expectations for a Federal Reserve rate hike this week, keeping the greenback and U.S. yields supported. The loonie continues to face additional pressure from renewed U.S.-Canada trade tensions, although elevated oil prices and the Bank of Canada’s more hawkish stance are providing some underlying support. Attention now turns to today’s Canadian CPI report, where a firmer-than-expected reading would strengthen expectations for an October BoC hike and could further support the loonie.

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EURCAD weakened in early trading as the Canadian dollar found support from strengthening oil prices ahead of today’s Canadian CPI release. The euro remains under some pressure following its recent pullback, although comments from ECB President Lagarde continue to reinforce the prospect of further policy tightening. Near-term direction will likely hinge on the Canadian inflation data and whether it strengthens expectations for another Bank of Canada rate hike.

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EUR fell to a one-month low below 1.1550 as surging oil prices, a broader risk-off tone and growing expectations for a Federal Reserve rate hike on Wednesday supported the U.S. dollar. Higher energy costs remain a significant headwind for the Eurozone growth outlook, although they are also reinforcing expectations that the ECB may need to tighten policy further following last week’s rate hike. Near-term direction remains dominated by the Fed decision and developments in the Middle East.

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GBPEUR gained in early trading, extending Friday’s advance after stronger-than-expected UK GDP and manufacturing data provided fresh support for the pound. The euro remains under some pressure despite last week’s ECB rate hike, while markets continue to expect the Bank of England to leave rates unchanged this week but potentially tighten later in the year. Near-term direction will also be shaped by comments from ECB President Lagarde and other policymakers.

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GBP eased in early trading as the U.S. dollar strengthened on rising expectations that the Federal Reserve will raise rates on Wednesday. The Bank of England is widely expected to leave Bank Rate unchanged at 3.75% on Thursday, although surging energy prices and persistent inflation have revived expectations for a hike later this year. Near-term direction for GBP/USD is therefore likely to be dominated by the Fed decision first, followed by the BoE’s guidance on the outlook for further tightening.

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