Dollar slips from 18-month high as oil eases and traders await US CPI

The US dollar extended its retreat from an 18-month high through the European and US sessions on Tuesday as oil prices eased and Treasury yields pulled back. Sterling led the gains among the majors, with traders betting on a Bank of England rate hike in November, while markets braced for Wednesday's US inflation report.

What moved and why

The dollar index slipped from its 18-month high before US CPI, FXStreet reports. Energy was the main driver. investingLive's European news wrap says risk sentiment improved as oil retreated, despite persistent Middle East tensions and stalled US-Iran negotiations. That followed a heavy Asian session, where investingLive reported the Kospi plunged more than 6% on a chip sell-off and oil fears.

The pullback looks limited so far. According to FXStreet, OCBC, Commerzbank and ING agree the dollar is on solid footing, supported by higher oil prices, firm US yields and sticky Fed tightening expectations. None of the three expects a decisive breakout or a sharp reversal soon. For more on how the index is built, see our sister site's explainer on what the dollar index measures.

The majors

For reference, the ECB fixing of 13 October put EUR/USD at 1.1188, up 0.06% from the 12 October fixing, and GBP/USD at 1.3246. USD/JPY fixed at 158.12, down 0.30%, and USD/CAD at 1.4241, down 0.15%. NZD/USD rose 0.25% to 0.5613. USD/MXN fixed at 18.335, still 2.17% above its level five fixings earlier.

• Sterling: FXStreet reports the pound rose 0.28% against the dollar to trade at 1.3244, as investors grew confident the BoE will raise rates in November. Against the euro, Societe Generale strategists note EUR/GBP failed at the 0.8610 hurdle and slipped below its July lows, according to FXStreet.
• Euro: EUR/USD traded around 1.1192, up 0.33% on the day, FXStreet reports, though worries over France's fiscal and political outlook persist. Investing.com reports Italy's bond spread to Germany widened amid French debt pressures.
• Canadian dollar: Scotiabank's Shaun Osborne and Eric Theoret see the loonie up 0.2% versus the dollar but lagging other G10 currencies, FXStreet reports.
• Australian dollar: FXStreet says AUD/USD edged higher on lower US yields and hawkish RBA signals. UOB analysts flagged major support at 0.6935 but see a sustained break as unlikely.

Chart: DXY on TradingView.

Central banks and data

BoE hawks remain in focus. investingLive reported that BoE's Greene warned waiting for second-round inflation effects would be too late. In Canada, markets are still pricing Bank of Canada tightening into year-end despite weak labour data, according to Scotiabank.

Germany confirmed September CPI at 3.3% year on year, unrevised from the flash and up from 2.9%, with energy the main culprit, investingLive reports. In the US, existing home sales came in at 3.99 million against a 3.95 million estimate, up 1.5% on the month.

Positioning is stretched. The Bank of America fund manager survey shows short US Treasuries is the second most crowded trade after long global semiconductors, investingLive reports.

What to watch next

1. US September CPI, Wednesday at 12:30 GMT. FXStreet says headline inflation is forecast to rise to 3.6% from 3.4%. Core prices are forecast up 0.2% on the month, against 0.6% for the overall index.
2. US-Iran developments and oil, which investingLive says continue to drive almost everything.
3. BoE November meeting pricing, after Tuesday's hawkish repricing in sterling.
4. French fiscal news, which continues to weigh on the euro and eurozone bond spreads.

Chart: GBP/USD on TradingView.