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Escalation in the Middle East\u00a0has led markets pricing\u00a0in a greater risk of a fully-fledged conflict in the region, which could potentially involve the US. Iran fired missiles at Israel yesterday evening, and while most were intercepted (the US called the attack \u2018ineffective\u2019), some targets have been reportedly hit. Israel has pledged to retaliate against Iran as it continues its ground offensive in parts of Lebanon, ING\u2019s FX strategist Francesco Pesole notes.<\/p>\n
\u201cOil rallied on the news<\/a> that Iran was preparing a missile attack yesterday, and stalled overnight around $74-75 bbl while awaiting the magnitude of Israel\u2019s retaliation. The situation remains highly volatile, but if Israel\u2019s response is not too aggressive, markets may take the view that both countries are for the second time this year preferring to de-escalate after a brief hostile exchange. The USD strengthened on the back of rising geopolitical tensions, with the Canadian dollar also rallying.\u201d<\/p>\n \u201cDomestic US developments have been overshadowed by geopolitics. The vice-presidential candidate debate for the US election didn\u2019t attract much attention. Meanwhile, data is broadly endorsing Fed<\/a> Chair Jerome Powell\u2019s recent pushback against a 50bp cut. While the ISM manufacturing was a bit softer than expected and prices paid dropped below 50.0, the Fed is laser-focused on the jobs market.\u201d<\/p>\n