Escalation in the Middle East has led markets pricing in a greater risk of a fully-fledged conflict in the region, which could potentially involve the US. Iran fired missiles at Israel yesterday evening, and while most were intercepted (the US called the attack “ineffective”), some targets have been reportedly hit. Israel has pledged to retaliate against Iran as it continues its ground offensive in parts of Lebanon.
Oil rallied on the news that Iran was preparing a missile attack yesterday, and stalled overnight around 74-75 USD/bbl while awaiting the magnitude of Israel’s retaliation. The situation remains highly volatile, but if Israel’s response is not too aggressive (perhaps refraining from targeting Iran’s nuclear infrastructure), markets may take the view that both countries are for the second time this year preferring to de-escalate after a brief hostile exchange.
The dollar strengthened on the back of rising geopolitical tensions, with the Canadian dollar also rallying thanks to the oil price jump and a rotation away from more geographically exposed or simply higher-beta currencies like SEK and NZD.
Domestic US developments have been overshadowed by geopolitics, but it has been an intense week already both on the macro and political side.
The vice-presidential candidate debate for the US election didn’t attract much attention. The media appears to slightly favour the Republican candidate as the debate winner, but this event doesn’t seem to significantly impact the overall election outcome. This is reflected in the subdued market reaction, especially when compared to the main candidates’ debate three weeks ago. Meanwhile, data is broadly endorsing Fed Chair Jerome Powell’s recent pushback against a 50bp cut. While the ISM manufacturing was a bit softer than expected and prices paid dropped below 50.0, the Fed is laser-focused on the jobs market, and the surprise rebound in job openings for August is contributing to a bullish short-term case for the dollar.
Ultimately, Friday’s payrolls will be the usual binary event for FX, although Powell’s hawkish comments and the market’s dovish pricing (still 70bp of cuts priced in by year-end) mean the bar for a USD-negative jobs report is higher. Today, we’ll see the ADP jobs figures, which can move the market but rarely have any predictive power for payrolls. Geopolitical events should remain the main driver.
Francesco Pesole