Weekly Preview: UoM Consumer Sentiment & Inflation, Costco Earnings

EUR/USD struggles to build on Friday’s modest recovery from the mid-1.1400 area, its lowest level since late July, and edged lower at the start of the new week. The pair traded around 1.1475 and remained vulnerable as geopolitical tensions continued to weigh on market sentiment.

European officials have warned of a potential increase in Russia’s drone, missile, sabotage, and cyber operations against NATO members supporting Ukraine. French President Emmanuel Macron said on Friday that the Russian hybrid threat facing Europe and France had intensified. These concerns have put additional pressure on the Euro, while heightened tensions in the Middle East have provided further support to the US Dollar as investors seek safer assets.

Geopolitical risks remained elevated after Iran-backed Houthis in Yemen said they had targeted sensitive sites in Riyadh with missiles and drones. Iran also outlined seven conditions for resuming talks with the United States. These developments have kept geopolitical risk premiums elevated and, together with the Federal Reserve’s relatively hawkish stance, have supported the US Dollar and weighed on EUR/USD.

Investors will now turn their attention to ECB President Christine Lagarde’s speech later on Monday for fresh clues about the central bank’s policy outlook. However, broader geopolitical developments are likely to remain a key driver of market sentiment. Attention will also focus on Thursday’s meeting between US President Donald Trump and Chinese President Xi Jinping, with any developments potentially influencing risk appetite, the US Dollar, and the near-term direction of EUR/USD.

Gold prices edged lower toward $4,365 during early Asian trading on Monday as the precious metal came under pressure from renewed geopolitical tensions in the Middle East and hawkish comments from Federal Reserve officials. Investors are now awaiting further remarks from Fed policymakers later this week for fresh direction.

According to Reuters, governments across the Middle East are preparing for a possible escalation after Iran said it had received intelligence suggesting that Washington was planning to resume military action against the Islamic Republic. Rising tensions could fuel concerns over higher oil prices and renewed inflationary pressures, potentially weighing on gold as markets reassess the outlook for interest rates.

The Federal Reserve raised interest rates by 25 basis points last week, bringing the target range to 3.75%-4.00%, while signaling that additional increases could be possible in the coming months. Higher interest rates generally create headwinds for gold because the precious metal does not generate interest, making yield-bearing assets more attractive.

Hawkish remarks from Fed officials have added to the pressure on gold. Kansas City Fed President Jeffrey Schmid said on Friday that he supported the recent rate hike, noting that recent data indicated inflation was running above 3%. Minneapolis Fed President Neel Kashkari also said on Sunday that inflation in the United States remains elevated across several parts of the economy and is not being driven solely by higher energy and oil prices.

Oil prices fell to their lowest level in more than a week on Monday as hopes for a diplomatic breakthrough in the US-Iran conflict encouraged investors to scale back some of the geopolitical risk premium in crude markets.

Market participants are increasingly watching for signs that diplomacy could help de-escalate the conflict. US President Donald Trump said he was open to meeting Iranian President Masoud Pezeshkian, who is expected to travel to New York this week for the United Nations General Assembly. Iran has also reportedly communicated conditions to mediators for restarting negotiations aimed at ending the conflict. However, the US and Iran continued to exchange threats on Sunday, leaving uncertainty over whether diplomatic efforts will lead to a meaningful reduction in tensions.

Meanwhile, concerns over disruptions to Middle Eastern oil supplies remain. Yemen’s Iran-backed Houthis said they had attacked what they described as sensitive sites in Riyadh with missiles and drones, as well as an Aramco facility in Yanbu, a major oil export hub on the Red Sea. China has reportedly asked Iran to help restrain the Houthis following an appeal from Saudi Arabia.

Despite the attacks, Saudi oil exports have shown signs of recovery. Disruptions to Aramco’s East-West pipeline have encouraged the company to increase shipments through the Strait of Hormuz after reducing some exports through Yanbu.

The combination of renewed diplomatic hopes and improving Saudi export flows has eased some immediate supply concerns, putting pressure on crude prices. However, continued attacks and the possibility of further escalation mean geopolitical developments remain a key factor for the oil market in the near term.

U.S. stocks ended mixed on Friday as investors took a pause following the previous session’s strong gains and assessed the Federal Reserve’s latest interest-rate decision, developments in the Middle East and growing concerns surrounding artificial intelligence safety. Rising Treasury yields added some pressure to equities, while investors continued to look for the next catalyst that could push Wall Street toward new highs.

The latest economic projections and comments from Fed Chair Kevin Warsh indicated a relatively hawkish policy stance. Although higher borrowing costs can weigh on equities, stocks rallied on Thursday as investors interpreted the rate hike as evidence that the central bank remained focused on controlling persistent inflation.

Away from the Middle East, concerns surrounding artificial intelligence also attracted significant attention from investors during the week. The debate intensified after Anthropic researcher Jacob Coxon resigned and raised concerns about the safety of advanced AI development. Anthropic scientist Evan Hubinger subsequently expressed support for those concerns, while Anthropic CEO Dario Amodei called for a slowdown in AI development in a lengthy blog post.

Other prominent figures in the technology industry, including OpenAI CEO Sam Altman, xAI founder Elon Musk and Google DeepMind co-founder Demis Hassabis, also commented on AI safety. OpenAI separately disclosed several reports describing unexpected or concerning behavior observed during the training or evaluation of its AI models.

With monetary policy, energy markets, geopolitical developments and AI-related concerns all competing for investors’ attention, Wall Street enters this week with several potential sources of volatility. The direction of oil prices, developments in the U.S.-Iran situation, Treasury yields and further signals from the Federal Reserve are likely to remain closely watched as investors assess the outlook for U.S. equities.