Forex Today: Risk aversion grips markets as tensions in Mideast escalate further

Here is what you need to know on Wednesday, September 2:

Markets adopt a cautious stance midweek as the crisis in the Middle East deepens. In the second half of the day, private sector employment data from the United States (US) will be watched closely by investors. Additionally, the Bank of Canada (BoC) will announce its monetary policy decisions.

During the American trading hours on Tuesday, crude Oil prices surged higher on news of the US military carrying out strikes that Tehran claimed killed civilians. Following the attack, "they will be hit again at a much harder and higher level, but it will not be the biggest attack of them all, that is waiting in the wings and, when it is over, there will be very little left of the Islamic Republic of Iran," US President Donald Trump wrote on Truth Social. In response, the Islamic Revolutionary Guard Corps says it attacked two US military bases in the United Arab Emirates (UAE).

The barrel of West Texas Intermediate (WTI) gained nearly 5% on Tuesday and touched its highest level since late July above $90 during the Asian trading hours on Wednesday before correcting lower. At the time of press, WTI was trading flat on the day, at around $89.50.

Brent extends gains as US-Iran tensions stoke supply fears

Analysts at Danske Bank note that in commodities, Brent crude has “climbed above USD 95/bbl., after trading around USD 90/bbl. earlier this week,” marking its highest level in nearly six weeks as renewed US-Iran hostilities intensify concerns over Middle East supply risks. They highlight that the US has “launched a second round of strikes in three days against IRGC targets,” with Trump warning that if Tehran retaliates, it will be hit “at a much harder and higher level.”

The US Dollar (USD) also benefited from the risk-averse market atmosphere on Tuesday, with the USD Index closing in positive territory. Early Wednesday, the USD Index continues to push higher toward 100.00.

The Reserve Bank of New Zealand (RBNZ) announced that it raised the policy rate by 25 basis points to 2.75% early Wednesday. This decision came in line with the market expectation. In the post-meeting press conference, RBNZ Governor Anna Breman said that they will need to take some time to assess the stance of the policy, adding that they are not on a preset course and the timing of another possible rate hike is highly uncertain. NZD/USD came under heavy bearish pressure following the RBNZ event and was lasts seen trading at its weakest level in nearly 3 weeks below 0.5850, losing about 0.9% on the day.

The data from Australia showed in the Asian session that the Gross Domestic Product (GDP) expanded at an annual rate of 2.1% in the second quarter. This print followed the 2.5% growth recorded in the first quarter and came in better than analysts' estimate of 1.8%. AUD/USD showed no reaction to the GDP reading and was last seen trading flat on the day, slightly below 0.7150.

USD/CAD gathers bullish momentum after closing in positive territory on Tuesday and trades above 1.3900 in the European session on Wednesday. Markets expect the BoC to leave the interest rate unchanged at 2.25%.

Canada-US tensions keep pressure on the Loonie despite BoC stance

Analysts at Commerzbank argue that the key headwind for the Canadian Dollar lies beyond domestic monetary policy. They stress that “the main problem for the CAD is nevertheless likely to remain unresolved: Relations between Canada and the US have once again hit a low point, and it is unclear whether the situation will improve in the coming weeks.” In their view, even if the BoC uses today’s meeting to signal a slightly more hawkish bias, “even if officials drop hints today, market participants should thus be aware that the CAD's fate currently depends more on US relations than on Canadian monetary policy.”

Bank of Japan (BoJ) board member Hajime Takata argued on Wednesday that the BoJ needs a nimble approach with rate hikes, adding that they need to consider a broad range of options, not just a 0.25% rate increase each time. "Rate hike pace should be assessed at every meeting. Generally speaking, consecutive rate hikes could be a possibility," he noted. USD/JPY stays on the back foot following these remarks and was last seen losing 0.35% on the day at 159.65.

Pressured by the broad-based USD strength, EUR/USD edges lower in the European morning on Wednesday and closes in on 1.1550.

Gold (XAU/USD) suffered heavy losses on escalating geopolitical tensions on Tuesday, losing more than 2.5% on the day. XAU/USD struggles to stage a rebound early Wednesday and fluctuates in a relatively narrow channel above $4,300.

Gold slips as higher oil prices revive US inflation concerns

ING commodities strategists note that gold has come under renewed pressure, with prices "eased to a two-week low, slipping below $4,300/oz," as escalating tensions in the Middle East drive oil prices higher. They explain that this move in energy markets has "prompted markets to reassess the outlook for US interest rates," with "rising energy costs" seen as potentially adding "to inflationary pressures and reduce the scope for near-term Federal Reserve easing," a combination that is "weighing on non-yielding assets such as Gold."