The big drop in Chinese markets we have seen over the past two sessions has kept the pressure on commodity dollars, although European majors EUR/USD and GBP/USD have been largely unaffected, with the likes of the DAX also following US markets higher on Tuesday. With not much on the US economic calendar today, expect the dollar to remain largely in a holding pattern but with a slight hawkish tilt, thanks to ongoing Middle East tensions and a hawkish shift in US rates expectations following Friday’s blowout US jobs report. In the near term, there doesn’t seem to be much to drive a significant US dollar sell-off, aside from a potential de-escalation in the Middle East. Markets have largely given up on the idea of a 50bp Fed cut, and this week’s US inflation data probably won’t change that. In the eurozone, while German industrial data showed a surprise month-on-month rise of 2.9% on Tuesday, this is highly unlikely to stop the ECB from cutting rates by 25 basis points next week. As a result, the EUR/USD’ path remains modestly tilted to the downside. Can the US Dollar Extend Gains?While the US dollar has surged since those hawkish remarks from Powell last week and the rather strong nonfarm payrolls report, we have seen more dovish signals emerge from other major central banks, including the ECB, BoE and BoJ. With Chinese markets also starting the week on the backfoot, this is an additional factor that is helping to keep the dollar supported against commodity and EM FX. The markets are now fully aligned with Fed Chair Jerome Powell’s resistance to 50bp cuts and are now pricing in 25bp cuts in both November and December. While some volatility should be expected in the next few days, but any major shift in the EUR/USD is unlikely before late October when new jobs and activity data are released, unless the ECB surprises next week. All eyes on US CPI this weekThis week’s key US data is on Thursday when we will have the latest CPI estimate. The PPI measure of inflation will be published on Friday. Together, these inflation figures aren’t expected to alter the Fed’s stance or the dollar’s strength significantly, unless there’s a major surprise. September’s core CPI is projected to drop to 0.2% month-on-month, down from August’s 0.3% increase. Even if the reading comes in at 0.1%, it’s unlikely to shift attention from the labour market. With the Fed now focused on its employment mandate, any unexpected inflation data should only create minor dollar volatility. Middle East Tensions and US Election Adding Pressure on EUR/USDWhile tensions in the Middle East may not escalate further, a meaningful de-escalation appears unlikely, which means oil prices could remain elevated, even if they have fallen quite sharply on Tuesday along with some other commodity prices, all thanks to China. If oil rebounds on further escalation in the Middle East tensions, then this should keep the pressure on the euro. Additionally, with the US presidential election just around the corner, defensive positioning should favour the dollar more than the euro. The polls are very close, suggesting a tight race. Kamala Harris has taken a narrow lead of 49% vs. 46% over Trump in the race for the White House, according to the latest New York Times/Siena College poll, which was conducted between 29 September and 6 October. Separately, a Reuters/Ipsos poll finds Harris’ lead over Trump narrowing to 46% vs 43%. Meanwhile, odds on a presidential election blockchain-based betting platform Polymarket, shifted majorly in Trump’s favour on Monday. If this means Trump’s chances of winning has increased, this is likely to be a negative influence on the EUR/USD outlook given his protectionist stance. EUR/USD Technical Outlook: Key Support Levels to WatchLast week saw the EUR/USD break a key support area between 1.1000 to 1.1025. It has therefore created an interim lower low, which is a bearish development. So, the path of least resistance remains to the downside and the next key support level to watch is around 1.0900, followed by the 200-day average around 1.0875. Unless we see a much weaker US CPI data, it looks more likely than not that these levels will be tested soon. 
