Dollar bounces back ahead of NFP, oil jumps as Iran deal hopes fade

Hawkish Fed signals buoy the dollar

The US dollar has wiped out all its losses from earlier in the week, receiving a late boost from increased geopolitical risks as well as hawkish signals from the Fed. Against a basket of currencies, the dollar might just manage to eke out a modest weekly gain following its 1.5% slump last week. But it all depends on the incoming jobs data, as a strong payrolls report could fuel bets for a September rate rise by the Fed.

The odds for a 25-bps hike at next month’s meeting were lifted slightly on Thursday following a report in the Financial Times that Chair Kevin Warsh would be prepared to back such a move in September “if inflation readings released in coming weeks are hot” according to people familiar with his thinking.

Hawkish bets were further boosted by comments from St. Louis Fed President Alberto Musalem who warned about the importance of putting a “meaningful restraint on underlying inflation” early on.

Yen braces for NFP impact

The dollar shot up against all its major peers on Thursday, despite the small moves in Fed funds futures. The strong weekly jobless claims numbers, which came in below 200k for a third straight week, likely added to the hawkish positioning ahead of today’s NFP release.

Nonfarm payrolls are expected to have increased by 80k in July, improving from June’s disappointing 57k print, while the unemployment rate is forecast to have held steady at 4.2%.

Investors will most likely be watching the dollar’s reaction against the yen the most, as the US currency smashed through the 158.00 barrier yesterday, risking a new round of intervention. It’s trading around 158.45 yen today, as weaker-than-expected household spending data out of Japan weighed on the yen somewhat.

Doubts about Iran talks spark oil rebound

Uncertainty about where the Middle East talks are headed also reenergized dollar bulls at the end of a rollercoaster week for oil prices. Despite the positive headlines earlier in the week, there’s still no final agreement between Iran and Oman on reopening the Strait of Hormuz.

Instead of offering fresh concessions, Tehran only seems to be raising its demands during the negotiations and wants to ban US and Israeli ships from using the strait and is seeking compensation from ‘hostile countries’ before their vessels can sail through.

The US is unlikely to agree to such terms, raising the risk that a deal won’t be reached. However, President Trump sounded upbeat on Thursday, saying the talks were “moving along good” and that the war is going to end “pretty soon”.

But that didn’t stop oil prices from surging again, with WTI oil futures briefly jumping back above $78 from Wednesday’s more than three-week low of $74.39.

The international benchmark Brent crude has bounced back more sharply, rising above $83 amid reports of fresh attacks by Iran in the Hormuz Strait.

Gold shines as buyers return

For the week, however, oil futures are still on track for hefty losses of around 8%, while gold is the best performing asset, notching up gains of more than 6% in its best week since January.

It’s unclear what’s propelled the precious metal to outperform, as a stronger dollar and higher oil prices have tended to exert selling pressure during the Iran conflict.

With support in the $4,000 region proving to be solid, sentiment might be shifting, attracting dip buyers.

However, growing concerns about persistent inflation and the worsening rout in chip stocks could also be attracting investors back into gold, which has soared above $4,300 today.

Wall Street rally stumbles ahead of NFP

Equity markets also had a good week, with the S&P 500 staring at weekly gains of 2.9%, which is the most since April. The Nasdaq 100 rallied even more, though all three of Wall Street’s main indices have been pulling back since Wednesday.

Both the Dow Jones and S&P 500 scaled new all-time highs, with several European and Asian indices also closing at record levels. But the mood has turned more cautious on Friday as investors await news of a deal in the Middle East as well as the US payrolls data for more clarity about the Fed rate path.

The mixed performance within the AI sector casts doubt about the sustainability of the latest rally, as it points to ongoing jitters about valuations and AI demand. But soft US jobs numbers today may keep it going for a while longer.