Dollar Holds Near 18-Month High, Brent at $104 Ahead of Wednesday CPI and Big Bank Earnings

Since the Federal Reserve raised rates in September for the first time since 2023, the Iran war has entered its eighth month, and the market's attention has moved from the Fed's decision to the inflation data that could force its next one. Monday, Oct. 12, brought fresh escalation in the Gulf and a dollar still sitting near its highest level in a year and a half.

Gulf escalation keeps oil high

Yemen's Iran-backed Houthis stepped up strikes on Saudi Arabia, and two tankers were attacked over the weekend. Brent crude futures were down 0.5% at $104 a barrel on Monday. That is still nearly 45% above where Brent traded before the war began on Feb. 28. Prices in some physical markets are double their prewar levels.

The modest dip followed Trump's Sunday announcement of an energy ceasefire between Ukraine and Russia. On Friday, Trump announced a separate deal with Russia to supply more diesel to global markets, paired with a temporary waiver of U.S. sanctions meant to cut Moscow's war revenue. Ukrainian President Volodymyr Zelenskiy criticized the waiver swiftly.

The supply cushion is thinning. More than 1 billion barrels have been released, mostly from onshore commercial inventories, since the war started. Industry executives say the oil still accessible to the global market is running low. The G7 has agreed to release another 100 million barrels of diesel and crude from emergency reserves, under pressure from Trump, who wants lower gasoline prices before the November elections that could cost Republicans control of Congress.

The Federal Reserve said in an analysis reported Oct. 9 that refinery outages are pushing gasoline prices up by more than the cost of crude alone. Gasoline is at record highs for autumn, with a significant share of global refining capacity offline. Diesel hit a record $6.50 a gallon on Sept. 21.

Dollar firm, Fed bets shift

The dollar index was slightly lower at 102.16 on Monday, within sight of last week's 18-month high. Speculators have piled in. Net bullish dollar positions, per weekly data from the U.S. markets regulator, rose to about $36 billion in the week to Oct. 7, from $8.4 billion three weeks earlier. Much of that came at the euro's expense. The euro held at $1.12 after a fifth straight weekly loss, weighed down by concern over France's finances ahead of the 2027 presidential election.

"The US dollar has strengthened recently on the back of negative developments overseas that have boosted its appeal even as market participants have pared back expectations for Fed rate hikes," MUFG currency strategist Lee Hardman said.

The CME FedWatch tool shows traders pricing an 81% chance the Fed stands pat at its end-of-October meeting, up from 51% a month ago. Pepperstone's Chris Weston said it is "a very high bar for the Fed to raise rates in October." But he said a hot number could bring a hike in December and possibly another in January, earlier than the market's current view of March.

Gold hovered around the $4,200 mark on strong ETF inflows but has struggled to hold above it.

CPI and banks this week

The September consumer price index is due Wednesday, Oct. 14. A Reuters poll of economists expects a 3.6% annual rise. The core measure, which excludes food and energy, is forecast at 2.5%. The Fed's target is 2%. Last week's consumer sentiment data showed households growing more downbeat in early October as the cost of living climbed.

Bank earnings start Tuesday. JPMorgan, Goldman Sachs, Citigroup and Wells Fargo report that day, with Morgan Stanley and Bank of America following Wednesday. The S&P 500 banks index is down 9% over the past month as Treasury yields rose.

"We've seen rates back up. We've seen energy costs back up," Matt Stucky of Northwestern Mutual Wealth Management said. "And the question is, how is this impacting the consumer?"

Matthew Miskin of Manulife John Hancock Investments said he expects "a sigh of relief" if the banks post good results. The broader earnings picture is strong. LSEG IBES estimates S&P 500 third-quarter earnings jumped more than 30%. The index set a record close last Tuesday, its first since mid-August, and is up more than 13% for the year.

Bangkok meetings without Bessent

Finance officials are gathering in Bangkok for the IMF and World Bank annual meetings, which will be dominated by the war and its inflationary fallout. Treasury Secretary Scott Bessent is skipping them and the G20 meeting the U.S. chairs this year. A U.S. official said he is handling domestic engagements, and he sent two senior officials instead. Fed Chairman Kevin Warsh will attend and is scheduled for a public event with IMF Managing Director Kristalina Georgieva on Oct. 16.

World Bank President Ajay Banga said global growth has held up better than feared since Iran closed the Strait of Hormuz, which cut off about 20% of the world's oil. But he said pressure is building again from soaring diesel prices, rising fertilizer costs and a looming super El Niño.

The next hard checkpoint is Wednesday's CPI print. The Fed's end-of-October meeting follows, and a number well above the 3.6% forecast would test the market's 81% bet on a pause.