- The conflict between the Houthis and Saudi Arabia has intensified.
- The euro has dropped with political uncertainty in France ahead of the 2027 elections.
- Forecasts show the US CPI accelerating by 3.6% annually.
Currency futures were on the back foot at the start of a new week as the dollar remained near an 18-month high. Demand for the greenback increased as tensions in the Middle East escalated, hurting risk appetite. Meanwhile, market participants are expecting the US CPI report due on Wednesday this week.
Dollar bets (Source: CFTC)
The dollar ended last week in the green after wild swings as traders focused on developments in the Middle East. Oil prices swung after reports indicated that Trump was not keen on signing a deal. Instead, he said he would start attacking Iran before the US midterm elections. The news briefly renewed worries about oil supply and inflation, which increased demand for the dollar. However, the president later retracted his statement. Although risk sentiment improved, market participants still expect bombs after the elections.
Furthermore, the conflict between the Houthis and Saudi Arabia intensified with the former targeting oil tankers and airports. If this conflict continues, demand for the safe-haven dollar will increase. Meanwhile, currency futures will suffer.
“We expect the Houthis to continue their attacks on Saudi Arabian energy assets, supporting gains in the oil price and the USD,” analysts at Commonwealth Bank of Australia said in a note.
They added that while Iran had confirmed receiving a US peace proposal through intermediaries, “we do not expect a breakthrough this week.”
Currencies like the euro and the yen are the most vulnerable to changes in oil prices. The Eurozone and Japan heavily rely on imported oil. Moreover, demand for the euro has dropped with political uncertainty in France ahead of the 2027 elections.
Elsewhere, traders are keeping an eye on US economic data for clues on the outlook for monetary policy. The last major report on employment led to a decline in rate hike expectations. Futures now show an 81% chance that the Fed will pause this month.
However, the CPI report due on Wednesday could change this outlook. Forecasts show price pressures accelerating by 3.6% annually and 0.6% in September. Hotter-than-expected figures will increase rate hike expectations. On the other hand, if inflation comes in softer, the likelihood of a pause in October will increase. Higher borrowing costs in the US increase demand for yielding US assets, boosting the dollar and hurting currency futures.
