USD: Sentiment meets fundamentals
Antonio Ruggiero
The US dollar is set to close Q3 nearly 1% higher. The key shift we’ve observed this quarter is a realignment of DXY price action with US macro fundamentals. While these fundamentals no longer support the dollar as strongly as they did earlier in the year – when a hawkish Fed dominated the narrative – the bearish pressure they now exert is more diluted. Tariff-related headline risks have faded, and the dollar no longer reacts with the same abruptness to negative developments.
Even so, despite more moderate price swings, the dollar’s sensitivity to macro data has taken on a more volatile character in today’s environment. This reflects a reconciliation between sentiment – how investors perceive and position around a currency – and underlying fundamentals. Upside macro surprises are being scrutinized more closely, and with expectations skewed toward weaker growth or higher inflation, the resulting price reactions are more pronounced when reality diverges from consensus.
The Fed’s unexpectedly hawkish tone at its latest meeting is a clear example. Markets had priced in a more dovish stance, largely in response to soft labour market data. When the Fed pushed back with a firmer message, positioning adjusted sharply. The dollar reversed pre-meeting losses (~1%) and ended the week roughly 0.1% higher.
Looking ahead, alongside PMI releases, the key event this week is the personal consumption expenditure (PCE) report – the Fed’s preferred inflation gauge. A downside surprise could pressure the dollar lower, reinforcing the view that tariff-related inflation is transitory rather than structural. Still, we expect the greenback to hold above the 97 level.
CAD: Unsightly
Kevin Ford
Canadian retail sales for July came in weaker than expected, with core sales (excluding autos) falling 1.2% month-over-month versus the -0.6% forecast, while headline sales matched expectations at -0.8%. The sharper-than-anticipated decline in core spending signals potential softness in consumer demand, which has weighed on sentiment around the Canadian economy.
This overall decrease of 0.8% to $69.6 billion was widespread, affecting eight of the nine subsectors tracked by Statistics Canada, with a slight exception in sales at motor vehicle and parts dealers. Provincially, sales fell in five provinces, with the most significant decreases in Newfoundland and Labrador (-8.8%) and Ontario (-1.6%), while Quebec saw the largest provincial increase at 0.2%. The broad-based decline particularly impacted food and beverage retailers (-1.3%) and clothing, accessories, and jewelry retailers (-2.9%). Despite the general downturn, e-commerce sales increased by 2.2% to $4.3 billion. Looking ahead, an advance estimate for August suggests a potential rebound with a 1.0% increase in retail sales, though this preliminary figure is subject to revision.
Over the past two months, the Canadian dollar has been trading within a tight range of 1.372 to 1.392, with only the New Zealand dollar and the Japanese yen performing worse month-to-date. FX volatility has plummeted, with the Canadian dollar experiencing the sharpest drop in realized volatility among G10 currencies. This is largely due to a lack of fresh economic catalysts and a rebound in the yield differential between short-term US and Canada government bonds, back above 100 basis points.
It’s also worth noting that the Bank of Canada, despite cutting interest rates after a six-month pause, remains hesitant to provide clear forward guidance. The central bank has highlighted the immense difficulty in gauging the impact of recent U.S. tariff policies on Canadian inflation. This week’s release of monthly GDP data for July should offer more insight into whether the Canadian economy has weathered the worst of the tariff storm, potentially signaling a modest rebound in economic activity for the third quarter.
EUR: Euro needs a villain
Antonio Ruggiero
Last week marked a complete reshuffling of rate expectations, shifting from disfavoring to favoring the common currency. The ECB appears to have ended its easing cycle, while the Fed is just beginning its own – cutting rates for the first time this year.
This locked-in advantage is likely to play out in the months ahead, primarily on the USD side. Expectations of further Fed easing should support EUR/USD, though the upside may be limited, as two additional cuts – likely the furthest the Fed could go this year – are already largely priced in. EUR/USD seems to be consolidating around the 1.17 level, which it struggled with throughout most of the summer but now appears better supported following recent rate dynamics. That said, with little the eurozone can offer to lift the euro, the currency remains increasingly reliant on negative US data to maintain upward momentum.
There isn’t much on the eurozone calendar this week, except for PMIs at both the country-specific and eurozone levels. Meanwhile, a soft US PCE reading could prompt EUR/USD to retest the 1.18 zone.
MXN: Weekly rebound
Kevin Ford
Over the last few days, the Mexican peso has lost some ground, rebounding from its 2025 year-high of 18.2, but still managing to gain 1.2% against the US Dollar month-to-date. This Thursday, Banco de México (Banxico) will meet to decide on its monetary policy. Markets are anticipating another 25 basis-point cut, which would bring the overnight rate to 7.5%. In its past meetings, the central bank has acknowledged that economic activity has slowed significantly over the past year, and monetary policy transmission has yet to fully materialize in the economy, while inflation remains within Banxico’s target range. The peso has found support from Banxico’s gradual easing policy. Despite some erosion of carry trade appeal, emerging market and Latin American currencies have performed well, especially since April. This strength is a result of a global environment where the demand for risk and high-yield assets has kept the peso supported.
Oil WTI continues declining, Gold hits a new all-time high
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 22-26
All times are in EST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
