The USD’s recent bounce seems to be losing steam, and it might need some strong adjustments to keep going. A US CPI report is coming out soon, predicting a 0.3% increase in core inflation over the last month. This might not be enough to give the dollar a boost. The market is already expecting an easing of 50 basis points by the end of the year, so any surprise inflation data could help the USD. Foreign exchange markets are calm right now, making it a good time for carry trades. However, the yen’s appeal as a funding currency could slow the recovery in spot prices, as traders are less worried about Japan’s situation.

Geopolitical Developments

In recent news, Trump has denied that the US plans to send long-range missiles to Ukraine, while the US has imposed new sanctions on Russian oil producers. This has led to a 4% rise in oil prices, which only offsets losses from earlier in October. For the USD to gain real support, Brent oil prices need to reach $70. It’s still unclear if the recent sanctions will effectively cut Russian oil exports, especially to India. Past events showed that the impact was usually minimal, so it’s too early to tell if these sanctions will lead to a permanent increase in oil prices. The US Dollar’s recent strength seems to be waning, and we think it needs a surprise to climb higher. The market is looking closely at the upcoming US CPI data, which is expected to show a 0.3% core monthly increase. Since futures markets, according to the CME FedWatch Tool, anticipate two full 25-basis-point rate cuts by the end of the year, any number above 0.3% could quickly change the market and lift the dollar. Currently, the market is characterized by very low currency volatility, making carry trades appealing. The Deutsche Bank FX Volatility Index is around 6.5, much lower than its 12-month average of over 8.0. This situation makes it cheaper to fund trades by borrowing Japanese Yen. Traders may want to use low-cost options to guard against sudden yen strength, like a surprise move from the Bank of Japan. New sanctions on Russian oil producers have increased Brent crude by about 4%, reversing losses from earlier in October and bringing it to around $68 per barrel. However, we doubt this rally will continue unless there are clear signs of supply disruptions. Our experience from January 2025, when similar sanctions were imposed, showed that Russian oil exports to Asia weren’t significantly affected.

Market Implications

The big question is whether these new sanctions will have a different effect, and so far, they don’t seem to be. Recent data on tanker movements indicates that Russian crude exports have only dropped by about 150,000 barrels per day— a minor shift. For traders, this means the recent rise in oil price volatility may be a chance to sell call options, betting that Brent will have trouble staying above the $70 per barrel mark. Create your live VT Markets account and start trading now.

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