It’s a complex chain of events, but the possibility of Israel targeting Iran’s oil infrastructure is definitely raising eyebrows around the world and giving a decent energy boost to oil prices. The barrel of US crude closed yesterday nearly 4% higher and above the critical Fibonacci resistance  of $72.85pb, the major 38.2% retracement on July to September retreat. As such, US crude has now left its bearish summer trend and stepped into the medium-term bullish consolidation zone. The next resistance stands at $75pb, the 50% retracement, then $77 and $80pb levels.

The upside potential is clearly present, the rising tensions if coupled with the threat of lower Iranian supplies, should give a further reason to the oil bulls to extend their tactical long positions. But it’s important to keep in mind that the gains that are made on the back of geopolitical tensions will – sooner rather than later – be given back. Tactical longs will benefit from the rising tensions as long as they last, and until the focus will return to the market fundamentals of ample global supply and prospects of slowing global demand.

Rising energy prices, US threat to supply chains increase inflation outlook

Even though the rising oil prices should not last long (hopefully), they may have an impact on the short and medium-run inflation outlook. That, combined with strikes in US East and Gulf coasts are inflationary. The spike in energy prices and supply chain disruptions were the main responsible for the soaring global inflation after the 2020s. Of course, today’s situation is not comparable to the pandemic period, but could – maybe - get the Federal Reserve (Fed) members question their overly optimistic view on inflation, and their overly dovish stance on rates.

The expectation of another jumbo rate cut is melting by the day. Activity on Fed funds futures gives less than one third chance of another 50bp cut from the Fed in the November meeting. Especially given that the recent data hasn’t been *that* bad, really.

Released earlier this week, both the jolts and the ADP reports have surprised to the upside. The ISM manufacturing index showed further weakness in both activity, prices and employment, but yesterday’s ISM services revealed a stronger expansion both in terms of activity and prices; the prices component of the index soared to nearly 60! All looked well besides employment. And overall, Citi’s US Surprise Index -which has hit a bottom this summer – rebounded strongly since then, and stepped into the positive territory lately, meaning that there are more positive surprises to the data these days than negative surprises and that the Fed doves have probably went far ahead of themselves.

US Jobs Watch

Today’s jobs data will be very important in providing a final conclusion to the week’s so far stronger-than-expected US jobs figures. The US economy is expected to have added near 147K new nonfarm jobs in September, the unemployment rate may have steadied near 4.2% and wages may have grown slightly slower than they did last month, but still by 3.8% on a yearly basis.

A set of soft jobs report from the US has the potential to fuel the dovish Fed expectations, weigh on the US yields, the dollar and perhaps keep appetite in equities robust. A stronger-than-expected set of figures, on the other hand, should bring the Fed doves back on earth, lead to a further rebound in the US yields and the dollar and probably weigh on equity investors’ appetite.

The dollar, on the other hand, will likely remain under the pressure of softening majors elsewhere. After the yen selloff earlier this week, the British pound took a severe hit yesterday, after the Bank of England (BoE) Governor Bailey, said in an unusually dovish statement that the Bank could become a ‘ bit more aggressive’ and a ‘but more activist’ in its approach to cutting the rates. Cable tumbled more than 1% in a single session and remains under pressure. The BoE’s hawkish stance – and its surprisingly strong economic performance in H1 – were the major drivers of the sterling bulls this year, and both look like they are in jeopardy at this point.