August began with markets hoping that the Iran ceasefire might still be salvageable. It ended with that hope gone. The June 14 truce had been fraying for weeks, but the August 31 exchange of U.S. and Iranian strikes confirmed that the conflict had entered a more dangerous phase. The Middle East remains the dominant global risk entering September, with the Strait of Hormuz still impaired and Red Sea shipping vulnerable to further disruption.
Trump continued to dominate the headlines. His shifting rhetoric on Iran, threats of additional tariffs and increasingly confrontational stance toward trading partners left markets trying to distinguish policy from positioning. The result was another month in which geopolitics, trade policy and energy prices overwhelmed the usual late-summer liquidity lull.
Central banks were not absent from the story, but they were competing with events. The Federal Reserve's September 15–16 meeting is now the month's major monetary-policy event after Chair Kevin Warsh's Jackson Hole remarks prompted markets to price a much greater chance of a rate increase.
September is unlikely to be a quiet month. A sustained rise in oil, a widening Middle East conflict, renewed trade friction and uncertainty around the Fed's reaction function leave global markets vulnerable to sharp moves in both directions.
The USD and Federal Reserve
The U.S. dollar spent August falling sharply before stabilizing. The DXY began the month above 101, dropped into the high-90s and then recovered toward 100 as geopolitical risks intensified. On September 2, it traded near 99.50.
The rally is less impressive than it should be as Middle East tensions would normally trigger a stronger safe-haven bid. However, traders are balancing safe-haven demand against concerns over U.S. tariffs, fiscal and political uncertainty, and the possibility that higher oil prices could hurt rather than support U.S. growth. A hike should support the dollar. Failure to deliver could trigger another round of dollar selling.
The July FOMC meeting left rates at 3.50%–3.75%, but the 9-3 vote highlighted a divided Committee. Warsh's August 28 Jackson Hole speech reinforced the hawkish argument, with markets now assigning roughly a two-thirds probability of a 25 bp September hike.
That makes August inflation and employment data critical. Firm inflation or evidence of broader energy-related price pressures would strengthen the case for a hike. Weak employment or benign core inflation would make it harder for the Fed to tighten.
The Canadian Dollar and Bank of Canada
The Bank of Canada held the overnight rate at 2.25% on September 2, as widely expected. The decision was uneventful. Q2 GDP rose 3.3%, and the unemployment rate edged down to 6.4% in July, although the Bank still sees excess supply in the economy.
The bigger issue is inflation, although the Bank's preferred measures, CPI-trim and CPI-median, remain on target at 1.9% and 2.0% respectively, giving the Bank room to sit on its hands for now.
September could be an important month for the Canadian dollar, but the reality is that it is America that is driving its direction. The loonie has some fundamental support from elevated oil prices and a Canadian economy that is proving more resilient than many expected. At the same time, a more hawkish Federal Reserve, higher U.S. yields and renewed trade uncertainty could keep the U.S. dollar in demand.
Oil Prices
WTI staged a dramatic reversal in August, rising from the mid-$70s to above $90 as renewed Middle East tensions revived supply concerns.
On September 2, WTI opened at $90.75, reached $92.28 and fell to $88.99 before trading near $89.14. The pullback looks more like profit-taking than a reversal, with oil still carrying a hefty geopolitical risk premium.
The Strait of Hormuz remains the biggest risk, and September's oil outlook depends largely on geopolitics. De-escalation could quickly unwind the risk premium. Any disruption to Hormuz or regional production could send WTI sharply higher.
