Traders Eye Potential US-Iran Talks

MACRO FRAME

With global monetary policy skewing toward a renewed tightening cycle, US-China talks take center stage as markets navigate elevated oil prices.

STOCK INDEX FUTURES

Equity index futures recovered from an overnight selloff to be mostly unchanged ahead of the open, with the Dow leading gains as oil prices fell. A Reuters report overnight detailed that Iran could reopen the Strait of Hormuz within a week on the condition that the US reduces its military pressure and lifts its blockade. It was also reported that Iran’s President will not meet President Trump this week at the U.N. General Assembly. Oil prices have fallen for four-straight days, though lingering risks from Houthi rebels in Saudi Arabia could test that dynamic. President Trump and Chinese President Xi will be meeting on Thursday, where it is expected that the two sides will advance their current trade truce and discuss potential agreements on AI-safeguards. Treasury Secretary Bessent said that in two months following the meeting, officials from both sides will meet again to discuss AI dangers and protocols in the event of AI safety incidents.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index gave up overnight gains to trade little changed overnight at 100.38. However, if further details around the US-Iran Reuters story unfold as productive toward a reopening of the Strait, the dollar could see further losses and a reduction in Fed tightening expectation. Still, traders continue to expect an additional rate hike before year-end, while the Bank of Japan’s rate hike on Friday and forward guidance was unconvincing to investors, giving the dollar a further edge. However, the of a possible intervention from Japanese authorities this week could see dollar strength. Money markets are priced for 33 bps of tightening by year-end. For the dollar, now that the immediate near-term downside risk from the BOJ is gone, oil prices will play a greater role in price action as markets look to US-China talks and the U.N. Assembly.

Watch point: A reduction in tightening expectations for the Fed will act as the greatest risk to the dollar maintain its move above the 100 level.

EURO: The euro is little changed at $1.1461. Little data out overnight leaves focus on possible US-Iran talks, which could benefit the currency, as traders await tomorrow’s French and German PMI data. Signals on European economic growth could play a major role in determining the timing of the next rate hike from the European Central Bank. While higher oil prices played a role in the central bank’s decision to raise rates, strong economic growth has set up conditions for the ECB to raise policy without considering much downside risk to economic growth or the labor market. A continuation of this trend will cement year-end rate hike expectations and could see the euro claw back some gains against the dollar. Money markets expect the ECB to hike marginally more than the Fed in the next 12 months, pricing in 76 bps of tightening vs. 74 bps.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which has been favorable to the dollar in advent of a hawkish repricing in Fed policy expectations the near-term.

BRITISH POUND: Sterling is little changed at $1.3359. Government borrowing figures revealed the UK borrowed more than expected in August, pushing the deficit further above official forecasts ahead of Healey’s first budget next month. Focus remains on the outlook for the Bank of England following its decision to hold rates steady, while it warned that tighter policy may be necessary to curb higher oil prices. PMI data this week is likely to help shape expectations on timing of a potential rate hike from the BoE after retail sales data unexpectedly rose 0.5% MoM in August against expectations of a 0.2% drop. Money markets are fully priced for a hike by year-end and are pricing 80 bps of tightening by April of 2027.

JAPANESE YEN: The yen is little changed at 157.35 yen per dollar. Japanese markets are closed through Wednesday for holiday, which could provide officials in Japan an opportunity to intervene in the market and prop up the yen with another round of intervention. The BOJ underwhelmed the investors following its divided decision to raise rates and Governor Ueda’s unconvincing press conference. Ueda said that underlying inflation is approaching 2%, and that the bank’s focus has shifted to guard against an inflation overshoot. Still, Ueda talked down back-to-back hikes or 50 bp increases, saying those moves were reserved for situations where inflation is extremely high and exceeding target. The two dissents come from the new, Taikaichi-appointed members, who were seen as being added to the board to influence policy in her favor. For the yen, the longer-term path appears biased toward gradual appreciation, though with real wages being low rather than negative, the path for policy could lag expectations.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie is 0.11% weaker at $0.7107, stronger risk appetite from lower oil prices is lifting the currency. Reserve Bank of Australia Governor Michele Bullock on Tuesday reiterated that inflation risks may be materializing did not offer any guidance on the path for interest rates this year. The Commonwealth Bank of Australia and ANZ joined the other two Big Four Australian banks in expecting a rate hike this year. ANZ is also expecting an additional move to 4.85% in November. The RBA left its cash rate at 4.35% at its August 12 meeting, by its own account a straight hold-versus-hike debate, not a cut discussion, after June labor data showed a still-robust market (employment +76,300, unemployment 4.4%, participation up to 67.0%), consistent with a cautious, higher-for-longer stance. Q3 inflation figures will continue to serve an outsized role in determining RBA policy and given that the September policy meeting is a month before the release, policymakers could wait until that data arrives before making any decisions. Markets are fully priced for a rate hike before year-end.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields moved lower across the curve in a flattening move as oil prices fell. No key US data on the calendar today, so markets will continue to trade headlines heading into today’s Two-year note auction. A continued drop in oil prices could see longer-term yields edge lower and maintain the 10-year’s dip below 5%, however, an uncertain backdrop and other domestic factors are likely to keep the bias of yields pointed upwards. Inflation risk, fiscal and corporate supply, capital competition and term premium are likely to remain the key factors in shaping long-term yield direction. Inflation expectations should remain anchored and leave further room for term-premium and corporate debt supply to determine price direction. St. Louis Fed President Musalem said that the Fed will need to raise rates further to combat inflation resulting from strong demand as well as the commodity price shock, which has moved beyond oil. Musalem is not a voting member on the FOMC and did not hint at the Fed’s possible next steps.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

Interested in more futures markets?  Explore our Market Dashboards here.