The Morning Update

The USD is steady, oil prices are rallying, equity markets are mixed, and US yields are rising amid an ongoing Middle East stalemate. The U.S. dollar held steady near a two-month high as elevated oil prices, rising Treasury yields and growing expectations for further Federal Reserve tightening continued to provide support. Markets now turn to a heavy U.S. data calendar, with Wednesday’s PCE inflation report and Friday’s nonfarm payrolls expected to be key in determining whether expectations for an October rate hike strengthen further. Global equity markets were mixed as the ongoing U.S.-Iran stalemate kept oil prices and bond yields elevated, while investors remained cautious ahead of a heavy week of U.S. data including PCE inflation and Friday’s nonfarm payrolls. Asian markets were mostly softer, with higher energy costs and renewed inflation concerns weighing on sentiment, while expectations for additional Fed tightening kept financial conditions restrictive. Elsewhere, oil prices rallied as the U.S.-Iran impasse continued to threaten Middle East supply, while President Trump said he is “very seriously” considering a U.S. diesel export ban as global fuel shortages worsen. Gold and bitcoin weakened as higher yields, tighter policy expectations and broader macro risk overshadowed demand for alternative assets. Today's economic calendar is quiet, so investors will remain focused on the Middle East for directions.

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News Headlines. China posts weakest industrial profit growth this year, expanding 4.2% in August. EU countries consider NATO-style joint responses to Russian hybrid attacks. Trump 'very seriously' considering diesel export ban as global supply crunch worsens. The US and China agree $60 billion low tariff regime for goods from foie gras to camels. Bond sell-off deepens as oil rises above $108. Terrorism arrests made in 'major incident' near US air base in UK. Trump sees no urgency for Canada deal as trade dispute deepens, USTR says. Iran insists on diplomatic solution after Trump rejects peace plan. Oil prices jump over 4% as Trump rejects Iranian proposal to reopen the Strait of Hormuz.

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In currency markets. Against the USD, JPY strengthened after Japan’s top currency diplomat reinforced Tokyo and Washington’s warning against excessive yen weakness, while faster Japanese services inflation added to expectations for further BoJ tightening. AUD remained relatively firm ahead of Tuesday’s RBA decision, with markets expecting a 25-basis-point hike to 4.60% as persistent inflation pressures keep the central bank in tightening mode; the prospect of higher Australian rates has helped cushion the currency despite the broader strength of the U.S. dollar. CNH also edged stronger after the Trump-Xi summit produced no major public breakthrough but avoided a fresh escalation in tensions.

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In commodity markets. WTI +4.22% | Nat Gas -4.54% | Gold -3.05% | Silver -4.77% | Copper -2.06% | Palladium -3.49% | Coffee +0.43% | Cocoa +0.36% | Soybeans -1.61% | Wheat -0.89%

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CAD begins a fourth week of declines, holding near 10-week lows against the USD after posting its third consecutive weekly loss. A widening US-Canada yield spread and expectations for further Federal Reserve rate hikes continue to favour the greenback, while softer Canadian economic data has added to pressure on the loonie. Despite a sharp rebound in oil prices this morning, USD/CAD remains above 1.41, suggesting the recent weakness in CAD has yet to reverse. Focus now turns to tomorrow’s Canadian GDP report, followed by Wednesday’s key US inflation data, with both releases likely to provide important direction for the loonie and expectations for the BoC and Fed policy outlooks.

EURCAD edges higher in early trading amid ongoing CAD weakness, despite rallying oil prices offering some support to the loonie. Focus this week turns to German retail sales and inflation data, followed by Friday’s key Eurozone inflation report for further guidance on the ECB outlook. Widening US-Canada yield spreads and ongoing US-Canada trade tensions remain headwinds for CAD, leaving the near-term bias for EURCAD modestly higher.

EUR holds steady against the greenback in early trading after three consecutive weeks of losses, with markets turning their attention to this week’s German and Eurozone inflation reports for further clues on the ECB outlook. Recent Eurozone business activity has shown some resilience, but strengthening oil prices are expected to impede EUR strength by increasing costs for the energy-importing region. Meanwhile, expectations for further Fed tightening continue to favour the USD, leaving EUR/USD vulnerable to renewed pressure despite signs that the recent decline may be becoming stretched.

GBPEUR strengthens in early trading, with GBP finding support on BoE Ramsden comments, while the euro remains subdued ahead of this week’s key German and Eurozone inflation reports. The cross is also benefiting from the sharp rebound in oil prices, which can weigh more heavily on the energy-import-dependent Eurozone and complicate the ECB outlook. Attention now turns to tomorrow’s UK GDP report, which is expected to be a key near-term driver for the pound.

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GBP rebounded from multi-month lows as markets increased expectations for tighter Bank of England policy, with the pound gaining against both the dollar and euro. Governor Bailey warned that persistently high energy prices could make it harder for the BoE to keep rates unchanged, while Deputy Governor Ramsden reinforced that message today, saying upside inflation risks are increasing and that continued pressure from energy, food and supply chains could create a case for higher rates. Markets are now pricing a strong chance of a November hike, giving GBP some support despite the broader strength of the U.S. dollar and keeping the policy outlook firmly in focus.