FX WRAP: Dollar gains as further hikes remain base case

USD was broadly firmer against peers as markets held onto the view of another rate hike this year despite the decline in oil prices today due to diplomatic hopes. Fedspeak from Goolsbee (2027 voter) and Musalem (2028 voter) reinforced expectations of another hike this year. Musalem argued that without further policy restraint, it is more likely inflation will remain substantially above the 2% target 18 months from now. Both members acknowledge that inflation is driven by both supply and demand, with Musalem noting that supply shocks are not just limited to oil, including base metals such as copper. The US data calendar this week is thin, leaving most focus on the UN General Assembly, in which Trump will meet with Leaders from Ukraine, the UK, Japan, and Gulf countries, with Trump potentially open to a meeting with the Iranian President. Additionally, Trump is set to meet with China's President Xi on Thursday in Washington. DXY trades near intraday highs of 100.45.

CAD and JPY underperformed vs USD, the former weighed by lower crude prices, whilst the latter continues to lag post BoJ on Friday. USD/CAD was little changed towards new remarks from BoC Governor Macklem. He noted that if new US tariffs remain in place, Q4 growth could be roughly halved to below 1% and noted the current question is whether the current rate is correct or if they need to raise it. USD/CAD made a new monthly high of 1.4039 whilst USD/JPY climbed back above 157.00 to ~157.38.

EUR/USD traded lower on USD strength. Over the weekend, a disastrous state election result for Chancellor Merz’s CDU has increased the chance of future political instability in the region.  However, the state election has little impact on the federal government, with attention shifting towards whether Chancellor Merz is forced to resign. So far, he intends to stay on.