Oil prices fell on Tuesday after giving up early gains, amid renewed concerns over trade tensions between the United States and China — the world’s two largest economies — and warnings from the International Energy Agency (IEA) about weakening fundamentals in the market.

Brent futures dropped $1.72, or 2.7%, to $61.60 per barrel, while US West Texas Intermediate (WTI) fell 2.9%, or $1.72, to $57.78 — bringing both benchmarks close to five-month lows.

On Monday, Brent had closed up 0.9%, and WTI ended the session with a 1% gain.

Tamas Varga, analyst at PVM Oil Associates, said: “We are still assessing the implications of the peace process in the Middle East, ongoing attacks on oil infrastructure in Ukraine and Russia, and the possibility of a renewed trade war between the world’s economic giants.”

US Treasury Secretary Scott Bessent said Monday that President Trump remains committed to meeting Chinese President Xi Jinping in South Korea this month, as the two nations seek to calm tensions over tariffs and export restrictions.

However, last week’s developments — including Beijing expanding restrictions on rare-earth exports and Trump’s threat of 100% tariffs and software export curbs beginning November 1 — weighed heavily on market sentiment.

In the latest escalation, China announced on Tuesday sanctions on five companies linked to South Korean shipbuilder Hanwha Ocean (which has US ties), while US and Chinese authorities began imposing additional surcharges on shipping firms that transport everything from holiday toys to crude oil.

IEA Warns of Weak Demand Amid Rising Supply

In its monthly report on Tuesday, the International Energy Agency raised its forecast for global oil supply growth this year — following OPEC+’s decision to raise output — but downgraded its demand growth outlook, citing deteriorating global economic conditions.

OPEC and its partners, including Russia, said in their own monthly report on Monday that the supply deficit in the oil market will shrink in 2026 as OPEC+ proceeds with planned production increases.

Market Indicators Reflect Supply Abundance

Market data shows that the six-month futures spread for Brent has narrowed to its smallest premium since early May, while the WTI spread reached its lowest level since January 2024.

This flattening of “backwardation” — where spot prices exceed futures — suggests traders expect smaller profits from selling into the spot market, reflecting increased near-term supply and reduced scarcity concerns.

The U.S. dollar’s sharp rally over the past month is unlikely to last, as analysts view it as driven largely by temporary factors — notably the suspension of U.S. economic data releases due to the federal government shutdown and political turmoil in rival economies.

The greenback has risen about 3% against a basket of major currencies since mid-September, recovering part of its 11% loss earlier this year and moving away from its lowest level in more than three years.

Data from the U.S. Commodity Futures Trading Commission (CFTC) — before publication was halted by the shutdown — showed that net short bets against the dollar fell to $9.86 billion from a peak of $20.96 billion during the same period.

Options markets also reflected this shift in sentiment, with one-month and three-month euro-dollar contracts hitting their lowest levels in favor of the euro since mid-June.

Still, most analysts doubt the sustainability of the dollar’s rebound.

Mark Chandler, Chief Market Strategist at Bannockburn Global Forex, said: “Over the three- to six-month horizon, I expect the dollar to weaken because the U.S. economy will slow and interest rates will decline.”

Analysts say much of the dollar’s recent strength stems from investors covering short positions rather than building new long exposure.

Jayati Bhardwaj, FX strategist at TD Securities, said: “What we’re seeing in the markets is simply position adjustment.”

Joel Kruger, market strategist at LMAX Group in London, noted that the dollar’s rally has probably lost momentum despite its strength in recent weeks. “There’s near-term downside risk for the dollar,” he added.

As of 11:53 GMT, the U.S. Dollar Index was up 0.1% at 99.4 points, after trading between 99.07 and 99.4.

International Developments Offer Temporary Support

The dollar’s weakness earlier this year stemmed from fading “U.S. exceptionalism,” fears that President Donald Trump’s protectionist trade policies would hurt growth, and concerns over America’s widening fiscal and trade deficits.

But with U.S. data releases suspended and new political crises emerging abroad — notably in Japan and France — investors have shifted their focus away from the dollar’s own vulnerabilities.

The euro fell about 1.3% in October, ending a two-month winning streak, while the yen weakened roughly 3% against the rising dollar.

Political instability in France — the eurozone’s second-largest economy — weighed on the euro, while leadership changes in Japan clouded expectations for the Bank of Japan’s monetary stance, pressuring the yen further.

Even so, analysts argue that investors’ reactions have been exaggerated.

Morgan Stanley strategists wrote on Friday: “The surprise result of Japan’s Liberal Democratic Party leadership election triggered an outsized yen sell-off as investors bet on fiscal expansion and looser monetary policy. We see this as an overextended positioning move.”

A Counter-Trend Rally

A Reuters poll in early October showed most FX strategists expect the dollar to weaken against all major currencies over the next three, six, and twelve months, citing the growing U.S. fiscal deficit and concerns about Federal Reserve independence.

Colin Graham, Head of Multi-Asset Strategies at Robeco in London, said: “The dollar will decline over time, but there are always counter-trend rebounds within a broader downtrend. We’re positioned short the dollar but managing our exposure dynamically.”

Could the End of the Government Shutdown Spark Another Move?

Analysts say the dollar could extend its rally if U.S. growth data surprises to the upside and the Fed refrains from cutting rates as expected.

For now, however, the same bearish fundamentals that pushed the dollar lower earlier this year remain — including concerns over slowing growth and monetary-policy uncertainty — though recent political events have overshadowed them temporarily.

Morgan Stanley strategists added that once U.S. data releases resume after the government reopens, they could serve as a catalyst for a yen rebound, advising investors to stay short on the dollar versus the yen.

With Fed Chair Jerome Powell entering the final months of his term — and amid ongoing White House efforts to remove Fed Governor Lisa Cook — analysts say concerns about Fed independence and confidence in the dollar will grow more prominent.

BofA Global Research wrote in a Friday note: “Investors remain uneasy about the Fed’s independence and its implications for the dollar, though their focus has temporarily shifted elsewhere.”

At the same time, the Fed’s expected resumption of its rate-cutting cycle will lower hedging costs for foreign investors, adding further pressure on the greenback.

Chandler of Bannockburn Forex concluded: “I believe the dollar’s major bull cycle has ended — we’re now in its downward phase.”

Gold prices rose in European trading on Tuesday, extending gains for the third consecutive session and continuing to break record highs, coming close to trading above $4,200 per ounce for the first time ever.

The rally was supported by strong safe-haven demand amid renewed trade tensions between the United States and China, as well as growing expectations of further interest rate cuts by the Federal Reserve.

To reassess these expectations, global financial markets are awaiting remarks from Fed Chair Jerome Powell later today on the economic outlook and monetary policy.

Price Overview

• Gold prices today: Gold rose by 1.7% to $4,179.14 per ounce from the opening level of $4,110.14, after hitting an intraday low of $4,090.74.

• On Monday, gold gained 2.2% — its second straight daily increase — after surpassing the $4,100 mark for the first time in history.

Trade Tensions

US President Donald Trump threatened on Friday to impose 100% tariffs on Chinese imports to the United States, while also announcing new export restrictions on advanced software, set to take effect on November 1. The move came in response to Beijing’s new limits on rare-earth and industrial equipment exports.

China defended its export curbs as justified measures to protect national interests but has so far refrained from retaliatory tariffs, signaling a desire to avoid a new escalation in the trade war between the world’s two largest economies.

US Treasury Secretary Scott Bessent said on Monday that President Trump remains on track to meet Chinese leader Xi Jinping in South Korea later in October.

US Interest Rates

• Philadelphia Fed President Anna Paulson said rising risks to the labor market strengthen the case for further rate cuts by the Federal Reserve.

• According to the CME FedWatch tool, markets are pricing in a 97% chance of a 25-basis-point rate cut at the October meeting, with only a 3% probability of no change.

Jerome Powell

Fed Chair Jerome Powell is scheduled to participate in a moderated discussion on the economic outlook and monetary policy during the annual meeting of the National Association for Business Economics in Philadelphia, where audience questions are expected.

Gold Outlook

• Kelvin Wong, Market Analyst for Asia-Pacific at OANDA, said: “Trade tensions are not the main driver today. Growing bets on continued Fed rate cuts, lower long-term borrowing costs, and a reduced opportunity cost are all supporting gold.”

• Analysts at Bank of America and Société Générale now expect gold to reach $5,000 per ounce by 2026, while Standard Chartered raised its average 2026 forecast to $4,488.

SPDR Holdings

Holdings in the SPDR Gold Trust — the world’s largest gold-backed exchange-traded fund — rose by 1.72 metric tons on Monday, marking a second consecutive daily increase and bringing total holdings to 1,018.88 metric tons, the highest level in nearly two weeks.

The British pound rose in European trading on Tuesday against a basket of global currencies, resuming its recovery from a two-month low against the US dollar, supported by a pause in the dollar’s rally ahead of key remarks from Federal Reserve Chair Jerome Powell.

Expectations are leaning toward a 25-basis-point rate cut by the Bank of England at its November meeting. To reassess these odds, investors are awaiting the release of key UK labor market data later today.

Price Overview

• GBP/USD: The pound rose by 0.15% to 1.3352 from the opening level of 1.3333, after touching an intraday low of 1.3326.

• On Monday, the pound lost 0.2% against the dollar, following a 0.4% rise on Friday as part of a rebound from a two-month low of 1.3262.

US Dollar

The US dollar index fell by more than 0.15% on Tuesday, pulling back again from its two-month high, reflecting a pause in the greenback’s advance against major and minor currencies.

This decline came as investors weighed the latest trade tensions between the United States and China, which, if they intensify, could reignite a trade war between the world’s two largest economies.

Federal Reserve Chair Jerome Powell is scheduled to participate in a moderated discussion on the economic outlook and monetary policy at the annual meeting of the National Association for Business Economics in Philadelphia, where audience questions are expected.

UK Interest Rates

• Following the Bank of England’s most recent meeting, traders increased bets on further monetary easing, expecting at least one additional 25-basis-point cut this year.

• Futures markets currently price a roughly 60% probability of a 25-basis-point cut at the November policy meeting.

UK Labor Market

To reassess these expectations, investors are awaiting the release of key UK labor market indicators later today, including September jobless claims, the unemployment rate, and average earnings for August.

Pound Outlook

Here at Economies.com, we expect that if the upcoming UK labor market data turn out softer than market expectations, the likelihood of a Bank of England rate cut in November will increase — likely placing downward pressure on the pound.