Oil Tops $100 Ahead of Fed Decision

Week of 14 SEPTEMBER

Oil surged past $100 a barrel this week as the US-Iran conflict escalated, dragging bond yields to multi-year highs and equities lower for four straight sessions. The ECB delivered a widely expected hike on Thursday, and Friday's US CPI report, holding at 3.4% annually with a hotter-than-forecast core reading, hardened the case for the Fed's own hike next week.

The week ahead is the busiest of the year for central banks, with the Fed, Bank of England and Bank of Japan all deciding on rates within 48 hours of each other, alongside UK inflation and US retail sales data.

Week in Review

Oil was once again the market's dominant force, surging past $100 a barrel as the US-Iran conflict escalated further this week.

Brent crude surged to a four-month high above $108 a barrel before easing back below $106 by Friday, still on track for its sharpest weekly gain since the conflict began. The rally followed reports of a second undisclosed Iranian attack on US Navy vessels and Houthi strikes on Saudi energy facilities, alongside confirmation of fresh US strikes on Iranian targets. WTI briefly topped $101, its highest level in years.

Equities buckled under the weight of surging oil prices and yields for most of the week, before Wall Street snapped its losing streak on Friday's CPI report.

The Dow, S&P 500 and Nasdaq fell across four straight sessions as rising energy costs and Treasury yields weighed on sentiment, before steadying on Friday as markets took an in-line CPI report in their stride. The FTSE 100 fell for a fifth straight session to its lowest level since early August before stabilising on Friday as stronger UK GDP data offset some of the pressure. Energy stocks were the standout gainers even as the broader market retreated.

The strain showed up hardest in bond markets, where borrowing costs climbed to levels not seen in years.

The US 10-year Treasury yield climbed to 4.97% on Friday, its highest since October 2023, after a soft Treasury buyback auction added to pressure from hotter producer prices. UK 10-year gilt yields climbed to 5.36% and UK 30-year gilt yields to 5.92%, both near 19-year highs and on track for a weekly rise of more than 20 basis points.

The ECB added to the pressure on Thursday, delivering its second hike of the year.

The ECB lifted its deposit rate by 25 basis points to 2.50% as oil-driven inflation pressure builds across the bloc. Christine Lagarde called the move a “no brainer” and gave little away on the pace of further tightening, leaving markets to keep pricing in more hikes ahead.

Gold felt the full force of the rate repricing, on track for a third straight weekly decline.

The metal slipped as low as $4,347 this week as rising yields and Fed rate-hike bets weighed, before rebounding to $4,365 on Friday after the CPI print. Headline inflation held at 3.4% year-on-year, roughly as expected, while core prices rose 2.4% annually, but a hotter-than-forecast 0.3% monthly core reading pushed the odds of a Wednesday Fed hike to around 90%, up from 70% a day earlier.

Biggest Market Movers

• UKOIL – gained around 9%, topping $108 intraday

• USOIL – topped $101, its highest in years

• XAUUSD – rebounded to $4,365 after Friday's CPI print, still on track for a third straight weekly decline

• US500 – steadied on Friday's CPI print after four straight losing sessions

• UK100 – down around 2% on the week, a fifth straight losing session before Friday's bounce

• GBPUSD – held near 1.3540, just off a three-week low

• BTCUSD – jumped 1.3% to $77,952 after the CPI print, still below $80,000

Top Events in the Week Ahead

Next week is arguably the biggest of the year so far for central banks, with the Fed, Bank of England and Bank of Japan all due to decide on rates within a two-day window, on top of UK inflation and US retail sales data.

Fed Set to Hike Despite Growth Concerns

The Federal Reserve's decision on Wednesday could deliver its first hike of the cycle, arriving just as the case for one has been building all week.

Markets are pricing in around 90% odds of a 25 basis point increase to 4.00%, up from 70% before Friday's hotter-than-expected core CPI reading. Chair Kevin Warsh's press conference will be watched closely for guidance on whether this is a one-off move or the start of a new hiking cycle. Gold is likely to be the most reactive market: a hike alongside hawkish guidance could send it sliding through this week's floor near $4,300, while a more cautious tone could spark a recovery back toward $4,500.

Bank of England Faces a Split Decision

The Bank of England meets a day after the Fed, with the pound sitting near multi-week lows just as gilt yields hit their highest levels in almost two decades.

The Bank of England is widely expected to hold rates at 3.75%, but Wednesday's UK CPI print could tip the balance if inflation surprises to the upside. A hawkish hold or a surprise hike could lift GBP/USD toward resistance near 1.3650, while a dovish tone alongside soft data could send the pair back toward this week's low around 1.3480.

Bank of Japan Rounds Out a Historic Week

The Bank of Japan closes out the week's run of central bank decisions on Friday, though a change in policy looks unlikely this month.

The Bank is expected to hold its policy rate at 1.00%, with markets more focused on signals about the pace of further normalisation than an actual move. USD/JPY will be the pair to watch given the yen's sensitivity to the week's other central bank decisions, particularly the Fed's.

Other Events and Earnings

Canada's CPI opens the week on Monday, followed by Chinese industrial production and retail sales, plus UK employment data on Tuesday. Wednesday adds US retail sales and New Zealand's Q2 GDP to an already packed calendar, and UK retail sales close things out on Friday.

On earnings, it's a quiet week following the past fortnight's run of major reports.