US yields keep the dollar in control
The US dollar enters the week with its strongest two-week advance since March, supported by US growth outperformance and a renewed shift higher in rate expectations. September’s composite PMI reached its highest since 2021, with stronger demand, capacity pressures and rising input costs pushing the two-year Treasury yield towards 4.9%. DXY has followed the front end closely, while the retreat in WTI has had little influence on the broader move. For now, US rates are setting the direction.
The 10-year above 5% adds another dimension, reflecting higher expected policy rates, rising real yields and a larger fiscal premium, rather than a clear loss of confidence in the Fed. The speed of the adjustment now matters as much as the yield level, with the MOVE Index offering an important gauge of whether rates volatility is beginning to spread into credit and equities. A gradual repricing remains broadly dollar-supportive, but a disorderly sell-off could trigger deleveraging and make the currency’s response less predictable.
Energy and European risks reinforce the relative US advantage. Brent above $100 and the absence of a concrete US-Iran agreement keep inflation uncertainty elevated, while a possible US diesel export ban could ease some domestic price pressure but tighten fuel supply abroad. Wider French spreads and Europe’s exposure to imported energy add pressure on the euro side of DXY. Dollar positioning has shifted from bearish to neutral, suggesting short covering has run its course without leaving long positions clearly extended.
This week’s PCE, ISM surveys and payrolls report will determine whether the rate move has further room to run. Firm inflation and activity readings would keep additional Fed tightening in play and could carry DXY through 101 towards 101.5, particularly if the two-year yield reaches 5%. A weak payroll gain would bring labor-market risks back into the policy debate and expose the 100 area, while a sharp rise in the MOVE Index would warn that the Treasury sell-off is becoming a broader risk event. The dollar remains supported, but both the data and the pace of the rates adjustment will shape the next move.
EUR: Energy and politics keep pressure on
The euro had a mixed week last week, rising against several G10 peers but falling more than 1% against the US dollar. The ECB’s hawkish stance remains broadly supportive, yet the scope for further repricing is becoming increasingly limited. Having already delivered two rate hikes, markets continue to question how much further rates can rise without weighing more noticeably on growth.
True, last week’s PMI and Ifo surveys reinforced the notion of a resilient Eurozone economy, pointing to solid underlying momentum despite the Middle East conflict and lingering political uncertainty. However, the data did little to support the euro as investors remain focused on relative rates and deteriorating external risks.
EUR/USD is trading below 1.14 near two‑month lows, extending September’s weakness as a combination of higher energy prices, rising US yields and firmer Fed expectations continues to favour the dollar. Another weekend jump in oil prices following unconstructive US-Iran talks has maintained downward pressure on the euro this morning. While EUR/USD’s correlation with energy has weakened compared with earlier in the year, a prolonged period of elevated oil and gas prices would eventually raise concerns around growth, competitiveness and the ECB’s ability to tighten further.
Politics are also becoming a bigger part of the story. The French-German yield spread has widened beyond 110bp, reflecting growing concerns around fiscal and political developments in the bloc’s two largest economies. While not yet a dominant driver, it adds another headwind at a time when the dollar already enjoys support from rates.
On the data front, inflation releases for September will be closely watched, starting with Spain tomorrow and Eurozone-wide figures published on Friday.
GBP: Credibility matters more than headroom
The Labour Party conference got underway over the weekend, giving investors an opportunity to gather clues ahead of the Autumn Budget, now around a month away.
Attention will turn to speeches from Chancellor John Heailey today and PM Andy Burnham on Tuesday.
Over the weekend, Burnham outlined an ambitious vision for social care, suggesting he wants to move towards a system that is effectively free at the point of use. Such a reform would come with a significant price tag, making tax increases an obvious funding option.
However, Burnham was also keen to stress that any comprehensive plan would be presented to voters ahead of the next general election (expected in August 2029), implying that major tax rises may not be imminent.
More broadly, there appears to be a shared reluctance within government to raise taxes in the upcoming Budget. That may reflect both the substantial revenue measures delivered in the previous two Budgets and the pressure that higher energy costs and the Middle East conflict continue to place on household finances.
In practice, that points to a willingness to allow fiscal headroom to narrow, something Healey is reportedly considering. Yet gilts and sterling remain broadly unfazed by this seemingly “undisciplined” fiscal stance.
In our view, a narrowing of fiscal headroom driven by external shocks is something markets can look through. What they are unlikely to forgive is a loss of credibility stemming from large, unfunded spending commitments. So far, the administration has acted strategically to avoid the latter.
The reaction of gilts and sterling to the upcoming round of speeches will provide the clearest signal as to whether that remains the direction of travel.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: September 28 – October 02
All times are in BST
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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.
