- Bond market stress. This month may be the calendar’s curse for U.S. equities – with the S&P 500 averaging its weakest monthly returns over the past 75 years – but this year, the spotlight is firmly on the bond market, particularly the long-end.
- Volatility reawakens. September kicks off with pressure squarely on global bond markets, complicating budget season across major economies. U.S. 30-year yields briefly topped 5%, while Japan’s borrowing costs hit record highs.
- Sterling’s gilt trip. In the UK, 30-year borrowing costs hit their highest since 1998, amplifying the broader bond selloff – while sterling’s slide underscores the market’s unease with Britain’s fiscal outlook.
- Sacré bleu. In France, French assets remain under pressure as Prime Minister Francois Bayrou faces a confidence vote on Monday as opposition parties push back on spending cuts.
- Resilient appetite. Despite the turmoil, though, risk appetite has firmed as Fed rate cutting bets build following soft labor market data. Almost 60bps of easing is priced in by markets by year-end.
- A striking asymmetry. The USD has held up well in the face of the bond turmoil, but if Fed expectations shift more dovish on a weak US jobs report on Friday, the odds grow that the dollar’s next leg lower could arrive sooner rather than later.
- Next week’s next test. All eyes are on the US non-farm payrolls today, but the upcoming US inflation report will also be pivotal for the Fed’s policy outlook and therefore drive FX markets more decisively.
Global Macro
Sobering week for global data
U.S. labor market slows significantly. The most crucial data point this week was the clear sign of a cooling U.S. labor market. In August, U.S. nonfarm payrolls increased by 22,000, which was considerably lower than the expected 75,000. Employment in health care and social assistance rose by about 47,000 in August. That’s the smallest monthly increase since January 2022. It’s arguably a big warning sign for the wider labor market given the sector has accounted for more than 40% of all new jobs over the last three years. The unemployment rate climbed as anticipated to 4.3%, while the participation rate edged up to 62.3%. Downward revisions to previous months’ data, including a negative print for June, the first since December 2020.
Manufacturing contraction continues. Manufacturing sectors in several major economies remain under pressure. The ISM Manufacturing PMI for the U.S. and the S&P Global PMI for Canada both registered below the 50.0 mark, indicating ongoing contraction.
Sterling weakens amid bond market stress. The pound sterling faced significant pressure this week, with GBP/USD and GBP/EUR experiencing sharp drops. This was driven by a global rise in long-end bond yields, which particularly impacted the UK given its large fiscal gap and stagflation concerns.
Mixed signals in services and trade: While U.S. services growth slowed, it remained in expansion territory. Conversely, Australia delivered a strong beat on its trade balance, which showed a significant surplus driven by rising exports.
Global growth concerns persist. Despite some positive surprises like Australia’s GDP and trade data, the overall sentiment points to a slowing global economy. Weak inflation in the Eurozone and persistent contraction in the UK’s construction sector add to the narrative of slowing momentum across major regions.
Week ahead
Policy pause, political pulse
ECB to hold fire. After several interventions suggesting that Lagarde remains firm on the next policy steps – still leaning hawkish – we expect the usual wait-and-see approach from next week’s ECB meeting. Having said that, while we don’t anticipate forward guidance to explicitly signal a rate cut, one more reduction, though underpriced by markets, remains a possibility should trade tensions with the US escalate further.
US inflation in focus. The US inflation report due next week will be pivotal for the Fed’s policy outlook. Markets are watching to see whether last month’s divergence between a high PPI and a steadier CPI will result in the latter spiking, as the tariff-induced pass-through begins to take effect.
UK data to test BoE nerves. A raft of UK macro data – including industrial production (m/m, y/y), monthly GDP, and manufacturing output – will offer fresh insight for the BoE. While the Bank maintains a cautious stance, it could be nudged toward a more dovish tilt if the macro backdrop continues to signal softness.
France faces political shake-up. Though not a data release per se, next week features a confidence vote in the French parliament on Prime Minister François Bayrou (Monday). Expectations point to a withdrawal of support, effectively collapsing the government. A realistic scenario thereafter involves President Emmanuel Macron appointing a new centrist or centre-right prime minister to deliver a diluted fiscal consolidation package.
FX Views
Calm before the storm
USD Dollar dances on thin ice The weekly narrative continues to reflect a cooling job market, yet investors seem to have largely shrugged off the soft surprises in JOLTS and ADP data. The dollar index (DXY) is down 0.2% on the week after a weak NFP report, suggesting fragile resilience despite mixed labor signals. Now attention turns to next week’s US inflation data: a miss would reinforce further easing expectations and potentially diminish the impact of the CPI print. However, after the weak payroll report, the CPI release may not be a key determinant in pricing out further cut expectations ahead of the September 17 FOMC meeting.
EUR Euro reacts to payrolls EUR/USD traded sideways this week and is breaking above 1.17 on a soft dollar after a weak payrolls report. In the options market, one-week implied volatility – now encompassing payrolls, US inflation data, and the upcoming ECB meeting – has climbed to a two-month high, underscoring the potentially significant impact of these events on EUR/USD’s next moves. The spike in options volatility, following year-to-date lows in August, suggests that market appetite for dollar weakness is becoming more selective, discounting headline risks, and thereby limiting further upside for the euro. Meanwhile, Christine Lagarde spoke twice this week but offered no major policy shifts, reinforcing the already priced-in hawkish tone.
GBP Gilt trip for the pound. The British pound posted its sharpest one-day decline against the U.S. dollar since April this week, driven by renewed anxiety over surging gilt yields, particularly the 30-year, which hit a 27-year high. The UK remains at the heart of global bond market stress, with fiscal concerns increasingly dominating investor sentiment. While selling pressure eased midweek, GBP/USD failed to reclaim its upward trend channel and stalled at the 100-day moving average. Technically, the picture is mixed: the 21-day moving average is still rising and approaching a crossover with the 50-day, which could signal a bullish turn – but for now, momentum is lacking. Sterling’s performance against the euro remains subdued as well. GBP/EUR has failed to close above €1.16 for ten consecutive weeks as macro headwinds continue to weigh. The UK’s stagflationary backdrop – marked by tepid growth and sticky inflation – alongside deepening fiscal concerns, casts doubt on the sustainability of sterling’s gains. Even with UK yields among the most attractive in the G10, the pound remains vulnerable to shifts in global risk appetite and domestic policy uncertainty.
CHF Yielding ground, holding shelter. The Swiss franc’s narrative has shifted over the past month – from a short candidate to a cautious haven amid global bond market volatility. Despite the franc’s ever-diminishing yield appeal, recent market stress has revived some defensive demand. Moreover, Swiss inflation data released this week showed a 0.2% y/y rise in consumer prices, slightly above the SNB’s 0.1% forecast. Traders now price just a 25% chance of a rate cut by year-end, down from 40%, which may lend extra support to the franc. Still, the currency shows limited upside from current levels, particularly against the euro. EUR/CHF is trading in the middle of the 0.9300–0.9450 range projected last month, and showing little inclination to break out. Options markets reflect this indecision, with positioning subdued and no clear directional bias emerging. Nevertheless, unless volatility fades again, CHF may retain a foothold as a shelter currency, even if upside remains capped.
CNH Strong services data supports Yuan as it nears ten-month high. China’s services sector continues to outperform, with the latest private PMI rising to 53—above both projections and prior readings. The uptick was driven by robust domestic demand and a recovery in foreign orders, fueling the highest level of new business since May. While official indicators remain more subdued, the divergence points to resilience in China’s core services and a stronger composite PMI. USD/CNH has shown weak price momentum, and USD/CNH hits near ten-month low. The next key resistance levels are at 21-day EMA of 7.125, followed by 50-day EMA of 7.1709. There’s a potential for short term rebound in USD/CNH, given RSI is nearing oversold levels again. Attention shifts to upcoming trade balance, CPI, PPI, and new loan data for further cues.
JPY Trade deal steadies Yen, data could stir volatility. The US-Japan trade deal—capping most imports at a 15% tariff—has provided clarity for Japanese exporters, while the commitment to a sizable US investment fund signals ongoing cooperation. Market is currently pricing in 94% probability of a rate hike in March 2026. USD/JPY remains in a positive price momentum, currently oscillating between support at 147.13 (100-day moving average) and resistance at key psychological barrier of 150.00. A break below the 144.97-146.84 support cluster could open the way towards 144, while resistance at 150.88-151.62 remains formidable, capping recent advances. Volatility could rise with upcoming releases of current account, GDP, and industrial production data.
CAD Still under pressure. The Canadian dollar has been trapped in a narrow trading range between 1.373 and 1.383 against the U.S. dollar this week, reflecting a period of low volatility. This sideways movement is a sign of pressure building from multiple fronts. On one hand, domestic economic data for Canada has been weak, with the Q2 GDP report showing a significant contraction of 1.6%. This data, coupled with other soft indicators like the manufacturing PMI, clearly limits the CAD’s ability to strengthen. On the other hand, the global narrative, particularly in the U.S., is a major factor. This week’s disappointing U.S. labor data has fueled market expectations of a Fed rate cut, which could put downward pressure on the USD. However, given Canada’s own economic struggles, a slowing U.S. economy and the high degree of trade integration between the two countries could easily put the CAD under more pressure. After the jobs report in Canada, which was weaker than expected, markets are pricing in a 25bps rate cut by the BoC in two weeks.
AUD Consumer spending slows rate cut momentum. Australian consumer strength is presenting a hurdle for swift RBA rate cuts. As disposable incomes and wealth rise, household spending has supported Q2 GDP and provided a buffer for the broader economy. RBA Governor Bullock remarked that ongoing consumer momentum could limit the number of future rate cuts, particularly with global trade risks persisting but not yet materializing into significant drags. AUD/USD remains under pressure, having lost ground from the 0.6625 late July peak and now testing near the critical 0.6500 key psychological support zone. A decisive break lower would signal a more sustained negative shift, with further support at 100-day EMA of 0.6478. Resistance is seen at key psychological barrier of 0.6600 next. With seasonality turning cautious for risk markets post-Labor Day, traders will focus on upcoming building approvals and NAB business confidence for further direction, with downside risks dominating near term.
MXN Holding up. The latest quarterly report from Banco de México reveals a clear and consistent dovish stance, marked by a commitment to supporting economic activity. The central bank’s Governing Board has systematically lowered its reference rate, implementing three separate cuts totaling 125 basis points to bring the rate down to 7.75%. This is a decisive move to ease monetary policy, even as inflation remains above the 3% target in the short term. By continuing the rate-cutting cycle and maintaining an optimistic forecast for inflation to converge to its target in 2026, the central bank signals that it is prioritizing the need to stimulate a persistently weak domestic economy. This dovish approach is a key part of its strategy to navigate global uncertainties and domestic “slack conditions” to achieve more robust and sustained growth. Despite these significant interest rate cuts and the central bank’s explicit dovish shift, the Mexican peso has shown remarkable resilience this year, largely unaffected by the change in domestic monetary policy. This is because the peso’s performance has been overwhelmingly driven by external factors rather than the policy decisions of Banco de México. Global demand for high-yielding, emerging-market assets has funneled capital into Mexico, while a broader weakness in the US dollar has further bolstered the peso’s value against its main trading counterpart. This dynamic has overshadowed the traditional influence of interest rate differentials, allowing the peso to maintain its strength and underscoring the dominant role that global macroeconomic trends and investor sentiment play in its valuation.
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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.
