US FX WRAP: Dollar outperforms as geopolitical tensions mount while eyes turn to US CPI

The Dollar firmed on Monday in relatively quiet trade amid the Columbus Day holiday, with the US Treasury cash market closed and liquidity somewhat reduced. Much of the newsflow centered on geopolitical and energy developments over the weekend. Trump announced an agreement with Russian President Putin to lift sanctions on Russian diesel exports in an effort to lower diesel prices for Americans ahead of the midterms. Trump also touted a potential ceasefire agreement between Russia and Ukraine, although neither side confirmed a deal, while Russia struck a Ukrainian power plant, raising further doubts over the prospect of an imminent agreement. Meanwhile, tensions in the Middle East remained elevated after the Houthis struck Riyadh airport in Saudi Arabia, and Trump reportedly considered joining the Saudis in striking the Houthis. Regarding US/Iran relations, Iranian Supreme Leader adviser Rezaei said the US had agreed to some of Iran's seven conditions, although Tehran considered the response inadequate, while further tanker attacks were reported in the Strait of Hormuz.

In the US, Fed's Hammack reiterated her hawkish stance, arguing that further tightening is needed given the slow return of inflation towards target. However, she noted that the question for the Fed is now how quickly to make policy more restrictive, expressing a preference for smaller rate adjustments delivered relatively quickly. Attention this week largely centers on Wednesday's US CPI report, ahead of Fed Chair Warsh's speech at the IMF early Friday morning BST, with both events likely to shape expectations for the Fed's policy outlook. The DXY rose above last Monday's high of 102.53 to print a fresh 2026 peak of 102.57 at the time of writing, its highest level since April 2025.

Dollar strength weighed on G10 currencies, with CHF the clear laggard, while NZD and EUR also underperformed. For the Euro, attention remained on French fiscal developments. Bank of France Governor Moulin said the economy was holding up despite the energy shock, although uncertainty was at its highest since April, while the Bank of France maintained its Q3 growth estimate at 0.1%. Focus now turns to Tuesday's French parliamentary budget debate. ING noted that French fiscal concerns could continue weighing on the Euro into the new year, while the Fed's hawkish inflation stance should support the Dollar. The bank expects EUR/USD to trade within a 1.10-1.15 range over the coming months, although it retains a bullish outlook for the pair in 2027.

GBP was a relative outperformer, with Cable only marginally lower amid continued calls from Burnham for closer UK-EU ties. CAD losses were limited by higher crude prices, while JPY was marginally softer in subdued trade amid Japan's Sports Day holiday and the US Columbus Day holiday. Both antipodean currencies weakened against the Buck, although AUD outperformed NZD.