Oil touches $110 as dollar slips, busy week ahead

Two big forces pulled in opposite directions as the week closed. Brent crude touched $110 a barrel for the first time since May as attacks on shipping around the Strait of Hormuz intensified, yet the US dollar still finished with its first weekly loss in more than a month. With the Federal Reserve now in its quiet period before its meeting later this month, the coming days are likely to be driven by oil, China and a heavy run of UK data rather than by Fed speakers.

View along the deck of a crude oil tanker at sea, with pipelines running towards the bow and the sun setting on the horizon — Crude tankers carry most of the oil that leaves the Gulf, which is why attacks near Hormuz move prices so quickly.

Oil back at its highest since May

Brent futures settled at $109.86 on Friday, up 3.7% on the day and 4.9% over the week, Reuters reported. US crude (WTI) settled at $101.41, its highest close since mid September, after a weekly gain of more than 10%. Brent briefly traded at $110 during the session before easing back.

The trigger was a fresh round of supply scares. CNBC counted at least nine tankers and cargo ships attacked near Hormuz since Sunday, Houthi forces in Yemen fired missiles and drones at Saudi Arabia, including one aimed at the Red Sea export terminal of Yanbu, and Ukraine said it would resume strikes on Russian refineries after an energy truce broke down. Yanbu matters because it is one of the main routes Saudi Arabia uses to send crude around the strait. Initial reports pointed to no damage there.

Flows through the strait have already fallen back. Kpler data cited by CNBC put crude shipments at about 9.4 million barrels a day for the latest week, roughly 70% of the prewar average, after they briefly returned to normal levels in September. In the US, a large fall in commercial crude stocks linked to hurricane shut ins on the Gulf Coast added to the squeeze on WTI.

Line chart of Brent crude futures daily closes this week, rising from 104.72 dollars on the prior Friday to 109.86 dollars on Friday, with most of the gain on the final day — Brent spent most of the week between $105 and $107 before jumping on Friday. Chart by Forexuro from Yahoo Finance daily closes for Brent crude futures (BZ=F).

Governments try to cool the market

Officials are trying to add supply. The International Energy Agency's governing board said in an official statement that members have released about 330 million barrels so far under the collective action agreed in March, and that they will speed up the remaining releases of around 100 million barrels, including more than 20 million barrels of diesel as soon as possible. Diesel is the tightest part of the market, which is why it was singled out.

The US Department of Energy separately asked companies for proposals on an exchange of up to 17 million barrels from the Strategic Petroleum Reserve. In an exchange, companies borrow crude now and return it later with extra barrels on top. OilPrice.com noted that the reserve holds about 283 million barrels, so a full take up would push it closer to the level usually treated as its operating minimum. So far, none of this has been enough to stop prices rising, because the market is reacting to what might happen to supply next rather than to the barrels already released.

Why the dollar fell anyway

On paper, expensive oil should help the dollar. The US is a large energy producer, while the euro area and Japan import most of their fuel, so higher prices usually hurt their currencies more. This week, interest rate expectations mattered more than oil.

US inflation came in hot. The Bureau of Labor Statistics said consumer prices rose 0.6% in September, lifting the annual rate to 3.7% from 3.4%, with gasoline accounting for more than half of the monthly increase. Core prices, which exclude food and energy, rose 0.3% on the month. Producer prices followed a day later with their biggest monthly increase in four and a half years, according to CNBC. Our guide to CPI and PPI inflation data explains why these two releases can swing rate bets so quickly.

The first reaction was a stronger dollar as traders added bets on a Fed hike. That faded as several Fed officials signalled no urgency to tighten again this month, and Fed Chair Kevin Warsh gave no guidance on rates in a speech at an IMF event. Treasury yields fell, and worries about the debt behind the AI build out weighed on risk appetite. Marc Chandler of Bannockburn Capital Markets told Reuters that concerns about the sustainability of AI now look to be offsetting the rate story that had driven the dollar since June.

The dollar index fell to 101.61 on Friday and was heading for a weekly drop of about 0.6%, Reuters reported. Markets put an 85% probability on the Fed keeping rates unchanged at this month's meeting, according to the CME FedWatch Tool, although pricing for a December hike remains high.

How the major currencies finished

Sterling rose to $1.3353, a weekly gain of 0.92%, and was one of the best performers against the dollar.
The Swiss franc also led the majors on safe haven demand, with USD/CHF falling to 0.8228.
The euro climbed to $1.1255, ending a run of five straight weekly declines.
The yen firmed as USD/JPY slipped to 157.79, snapping four weeks of losses for the Japanese currency. Bank of Japan Governor Kazuo Ueda again warned that underlying inflation could overshoot the 2% target.

Gold caught between oil and yields

Gold had a round trip week. It fell more than 1% on Wednesday after the inflation data to close near $4,100, then recovered sharply on Thursday and Friday as Treasury yields dropped, FXStreet's weekly review shows. Spot gold was at $4,175.34 an ounce near the end of Friday, still down 0.4% for the week, CNBC reported.

The tension for gold is simple. Hot inflation and conflict headlines normally support it, but higher interest rates raise the cost of holding a metal that pays no yield. "We're very much rangebound and tilting toward the lower bound of support," Bart Melek of TD Securities told CNBC. FXStreet's forecast poll leans sideways for the coming week, with 67% of contributors expecting range trading and none bearish, while 86% lean bullish on a one month view. For gold traders, the link with the dollar and with real yields remains the one to watch, as our dollar index and gold guide explains.

Line chart of gold futures and the US dollar index this week: gold dips to about 4,108 dollars on Wednesday and recovers to about 4,181 dollars on Friday, while the dollar index ends the week lower near 101.8 — Gold bottomed on Wednesday and recovered as the dollar index slipped late in the week. Chart by Forexuro from Yahoo Finance daily closes for COMEX gold futures (GC=F) and the ICE US dollar index (DX-Y.NYB). Futures closes can differ slightly from spot prices quoted in news reports.

The week ahead

China opens the week with third quarter GDP, retail sales and industrial production on Monday, and the People's Bank of China sets its benchmark lending rates on Tuesday. The UK has the busiest calendar: the labour market report on Tuesday, inflation on Wednesday, then retail sales and flash PMIs on Friday, with Bank of England Governor Andrew Bailey due to speak on Wednesday and Thursday. Japan publishes inflation on Friday, alongside flash PMIs for the euro area and the US, according to FXStreet's weekly preview.

The US calendar is light, with housing data, weekly jobless claims and the flash PMIs the main releases, and the Fed's blackout period keeps officials quiet. That leaves more room for geopolitics, oil and bond yields to drive prices, and for the UK data cluster to move sterling.

What this means for signal traders

Be ready for a gap at the open. Weekend headlines from the Gulf or Ukraine can move oil, gold and the yen before most traders can react. Our guide to slippage, gaps and weekend risk covers how stops behave when that happens.
Mark the UK cluster. Jobs, inflation and retail sales within four days can move GBP pairs sharply, and spreads often widen around each release.
Watch oil and yields together. Rising oil feeds inflation fears, while softer yields have been pulling the dollar lower. Whichever force wins is likely to set the tone for majors and gold.
Respect the gold range. With gold rising almost $100 from Wednesday's close to Friday's high, stops placed too close to the price can be hit by normal noise. Size positions from the stop, not the other way round.
Keep position size steady. A light US calendar does not mean a calm market when conflict headlines are moving energy prices.

None of this predicts the next move. It describes the conditions that any forex or gold signal will face in the days ahead.

Sources

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Oil touches $110 as the dollar slips: what to watch this week