Dollar Gains As Middle East Turmoil Takes Over

Impact on GBP: Risk aversion sends GBP/USD below $1.3300 due to rising geopolitical tensions

GBP/USD remains tepid following the losses registered in the previous session, trading around $1.3280 during the Asian hours this morning.?This downside could be attributed to risk aversion due to the rising geopolitical tensions in the Middle East, which undermines the risk-sensitive Pound and Dollar pair?(GBP/USD).?Iran launched over 200 ballistic missiles at Israel on Tuesday, shortly after the US had warned that a strike was imminent.?

Elsewhere,?Sterling may be facing downward pressure as the?BoE policymaker Megan Greene indicated that further interest rate cuts are likely since prices are "moving in the right direction." However, Greene also cautioned that a consumption-driven recovery in the United Kingdom could spark a new wave of inflation, according to Bloomberg. GBP/EUR extends its losses for the second successive session, trading around?€1.1990 during today's Asian hours. Traders are evaluating the impact of rising geopolitical tensions in the Middle East, which may have adversely affected the trade volumes of risk-sensitive currencies.?

No Major Data.

Impact on EUR: EUR/USD Slips Amid Geopolitical Risks and Policy Pressures

In previous FX updates, it has been highlighted?how EUR/USD looked expensive in light of wider rate differentials (in favour of USD) and rising risks from the Middle East and French politics. Ultimately, it was the Israel-Lebanon-Iran tensions that triggered a move below $1.1100, but the other two factors also remain negative for the pair.

French Prime Minister Michel Barnier faced a rough first speech in the Parliament, drawing criticism from both left- and right-wing factions as he laid out his policy plans. Despite a central pledge for fiscal consolidation, he delayed the plan to bring back the deficit within the 3% EU limit by two years, to 2029.?

On the rates side, short-term differentials look unlikely to retighten sharply in the near term in favour of EUR, as markets are already pricing in 70bp by year-end from the Fed and yesterday’s decline in Eurozone’s inflation below the 2% target means significant pressure on the ECB to continue cutting at the October meeting.

According to ING Bank, they are?calling for EUR/USD re-testing $1.1000 in the short term.

No Major Data.

Impact on USD: Middle East Tensions Lift USD, Geopolitics Dominate

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.

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.?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.

Major Data 13.15: ADP Non-farm payroll Employment Change expected 124k from 99k.

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