Dollar holds firm as oil rally fuels Fed rate expectations

Oil prices ignore Trump’s commentary 

Oil prices remain elevated, hovering in triple-digit territory, with the December WTI oil futures contract trading at $93. The latest oil price rally prompted a reaction from US President Trump overnight. His comments about the US-Iran conflict not lasting long, a complete reversal from last week’s statement that the conflict would extend until the US midterm elections in early November, and his announcement that both Russia and Ukraine have agreed to refrain from targeting oil installations, which is still just a proposal and has not been approved according to the Ukrainian President, appear to have put a ceiling on the oil price rally.

However, these comments failed to engineer a price drop, as investors are still focused on the damaged Saudi Arabian oil pipeline, which could take several weeks to become fully operational again following repeated attacks, and the fact that, despite months of deliberations, the Strait of Hormuz remains mostly closed and littered with Iranian mines.

Trump has suddenly become more anxious about oil prices, as US consumers begin to feel the impact of higher energy costs. He won the 2024 Presidential election by capitalizing on voters’ anger over runaway inflation post-COVID, but he is facing a similar issue that could prove extremely costly. The loss of the majority in either chamber of Congress, with the focus being on the Senate, could really hamstring the administration for the next two years.

Dollar rally lingers

With oil prices weighing on risk appetite and US equity futures surrendering most of yesterday’s gains, the US dollar remains in demand after a decent start to the new week. Dollar/yen is tentatively edging higher today, as investors prepare for Friday’s BoJ meeting, and pound/dollar is in the red, despite the decent employment and earnings releases earlier today. 

Interestingly, risk-on currencies like the kiwi and the aussie are underperforming at the time of writing, with the latter also affected by the mixed Chinese data that mostly confirmed that both domestic demand and the housing sector challenges remain unaddressed by Chinese officials.

A quiet US data calendar today and a 20-year Treasury auction, a rather unloved area on the Treasury yield curve, will allow investors to remain focused on tomorrow’s Fed meeting. Markets have quickly adjusted their expectations, with a 25bps rate hike now priced in for tomorrow (Wednesday), and similarly sized hikes currently expected in both December and March 2027. Despite this aggressive Fed repricing, ECB rate expectations are even more hawkish, with almost 70bps of tightening expected by March 2027, in addition to last week’s rate hike.

That said, and despite persistent hawkish rhetoric from ECB officials, euro/dollar is edging lower today, testing yesterday’s low of 1.1522 and the support set by the 50-day simple moving average (SMA). A retest of the lower boundary of the wide trading range that has been in place since June 2025 could be on the cards at tomorrow’s Fed meeting if Warsh satisfies the hawkish expectations.

Gold slips, bitcoin eyes vote 

While gold continues its downwards journey, being almost 9% below the late August peak and awaiting the Fed meeting, cryptocurrency investors prepare for today’s pivotal Senate vote. At 18:15 GMT, with the usual caveat about a short time delay, senators will vote on whether to allow the Clarity Act to be formally discussed and amended in the Chamber. 

As 60 senators need to approve it or the bill will stall, there has been a last-minute ethics compromise from the White House. Chances of approval remain split, with a likely failure potentially triggering a significant downleg in cryptos. Specifically for bitcoin, the sizeable August price gains could be under threat.