Oil slips, dollar holds firm as Trump heads to the UN

Muted movements in FX, all eyes on UN gathering

A rather subdued start to the new trading week, with the US dollar posting muted gains across the FX spectrum at the time of writing. Investor attention is now fixed on oil price action and the various significant events of the week.

Oil markets are in the red today, as the lack of military operations from the US is signalling some appetite for negotiations with both Iran and the Houthis. Indeed, while President Trump is maintaining his war-like rhetoric and threatening to “blow the entire nation (Iran) up”, he stopped short of even carrying out limited strikes against the Houthi rebels as he is examining the latest set of proposals sent from Iran. These appear to involve the unfreezing of Iranian funds and the reopening of the Strait of Hormuz, which would lead to a significant drop in oil prices.

With the countdown to the November 3 midterm election having already started, and Republican chances of retaining control of Congress thinning by the day, Trump’s options are limited: escalation or interim agreement. Further escalation could prove disastrous for the global economy and potentially intensify de-dollarization, while a truce could materially help his party’s electoral performance and potentially remove Fed Chair Warsh’s biggest argument for further rate hikes.

Focus is gradually shifting to the UN General Assembly in New York. Trump is expected to address the Assembly on Tuesday, with a plethora of meetings scheduled during his visit. The US President’s meeting with Gulf leaders could prove critical for the Iranian conflict – Saudi rhetoric could be indicative of the outlook – while the Trump-Zelenskyy encounter will be equally interesting. Trump continues to complain about Ukraine targeting Russian oil installations, which adds pressure on oil prices.

These meetings will also be the appetizer for Thursday’s US-China summit. Risk appetite has improved overnight, with US equity futures pointing to another solid opening today, as the preparatory meetings between US and Chinese officials made progress, confirming the positive environment in the negotiations. As a reminder, there is no comprehensive trade agreement in place, but a framework understanding, which expires on November 10. 

Rate expectations remain in the spotlight

The oil price rally triggered rate hikes in the previous two weeks, fuelling expectations for further rate moves. Even ECB doves like Greece’s Stournaras acknowledge the threat of accelerating inflation pressures, supporting bets for at least another rate hike by year-end. Wednesday’s preliminary PMI surveys are key to maintaining the current inflated ECB rate bets.

However, political developments appear to overshadow the ECB’s rate outlook. There is an increasing probability of President Lagarde leaving the ECB to become a candidate at the French Presidential election of 2027, especially as Marine Le Pen continues to lead the polls, while Germany’s Chancellor is under extreme pressure. Following the weekend’s abysmal performance at two state elections, in which the AfD party was once again the main gainer, Merz could soon follow in the footsteps of the UK’s Starmer.

Euro/dollar has been range-trading since Wednesday’s Fed meeting, currently hovering at 1.1470. With the US data calendar being rather light this week, the focus will be on Fedspeak and in particular comments from Fed doves. Tuesday appears to be a key date, as Vice President Jefferson and New York Fed President Williams will be on the wires.

Interestingly, following the hawkish Fed hike last week, there is momentum for back-to-back action as at least two US investment banks have pencilled in a late-October move. This is a bold move, revealing low expectations for progress on the US-Iran conflict, thus keeping oil prices elevated.

Dollar/yen climbs, bitcoin rally stalls, gold in retreat

Following Friday’s alleged rate check, dollar/yen has climbed above 157 again. That said, with Japan observing a three-day-long bank holiday, chances of another intervention could be high. Meanwhile, bitcoin is maintaining Friday’s gains, with the $82k threshold acting as a ceiling at this stage, and gold hovering around the 4350 area, remaining firmly inside the short-term bearish trend channel since the late-August peak.