Dollar awaits CPI after mixed PPI, ECB hiked as expected

USD: Dollar awaits CPI after mixed PPI

The US dollar edged back toward 99.00 on Thursday after closing at 98.817. August producer prices rose 0.4% on the month, matching forecasts, while annual PPI accelerated to 5.4% from a revised 4.8%. However, core PPI rose by a softer 0.2%, below the 0.3% estimate. The mixed report offered neither a clear boost nor much relief for the dollar.

Treasury yields remain elevated as markets weigh stronger energy inflation against softer underlying prices. The two-year yield climbed toward 4.48%, while the 10-year approached 4.90%. Initial jobless claims were broadly steady at 206,000, and continuing claims fell to 1.774 million. The data kept the case for a September Fed hike alive without settling the debate.

Oil adds another layer of uncertainty. Brent climbed above $104 a barrel as supply disruptions intensified, raising transport and production costs across the economy. Yet higher yields have provided limited support for the dollar as yen strength and the US policy premium cloud the signal. The European Central Bank’s latest rate increase may also support the euro and limit any DXY recovery.

DXY continues to struggle above 99.00, with 99.20 marking the next resistance level and 98.60 offering near-term support. Friday’s CPI report is now the decisive input before the Fed meets on September 15 and 16. A firm reading could lift hike expectations and push DXY toward 99.70 to 100.00. Softer inflation would weaken the case for action and leave the 98.00 area exposed.

EUR: ECB hikes as expected, Lagard’s presser in focus

The ECB delivered the expected 25bp rate hike, taking the deposit rate to 2.50%, but the immediate market reaction was muted given the move had been fully priced for weeks.

The policy statement struck a familiar balance. Policymakers acknowledged that upside risks to inflation remain evident, while also noting downside risks to growth, stopping short of committing to any particular path for future rates. In other words, the ECB is keeping its options open rather than validating the market’s expectation of almost two further hikes by the end of 2026.

That leaves the focus squarely on President Lagarde’s press conference. German yields have edged modestly higher since the announcement, suggesting markets see little reason to materially scale back tightening expectations just yet. However, EUR/USD remains near the lows of the day, highlighting a degree of scepticism over how much additional hawkishness the ECB can realistically deliver.

This fits with the broader narrative we have highlighted in recent weeks. The euro has been supported by a relatively hawkish ECB backdrop and improving eurozone data, but the market is increasingly questioning whether higher rates can continue to support the currency if growth risks persist and energy prices remain elevated.

CAD: Loonie resilience faces a harder test

USD/CAD closed Wednesday at 1.381 after trading between 1.376 and 1.382. The pair rose 25 pips from Tuesday’s close, leaving the Canadian dollar slightly weaker despite support from oil above $100 a barrel. Canadian yields also moved higher, but the two-year spread with the US held near 126 basis points. That kept USD/CAD near the middle of its recent range.

The muted reaction to the trade dispute is striking. Washington has announced import bans on selected Canadian goods and restrictions on Canadian suppliers seeking US government contracts. The direct export exposure is small, but the use of outright bans raises broader questions about the future of USMCA/CUSMA. Canada’s response covers 893 tariff lines and combines consumer goods with industrial inputs.

Ottawa has calibrated the package through different tariff rates, in-transit exemptions and a remission process. Even so, Canadian businesses will face higher costs, weaker margins and delays in sourcing key inputs. The direct CPI impact should be moderate and gradual as firms draw down inventories and honour existing contracts. A prolonged dispute would create a tougher mix of slower growth, weaker investment and higher production costs (For more details on US-Canada trade developments, and what the new tariffs mean for Canada, see here).

That backdrop leaves the loonie’s recent resilience exposed. Canada faces a larger relative growth shock than the US, while August’s 41,700 job decline and slower wage growth already weaken the case for a Bank of Canada hike. Core inflation near target gives the Bank room to tolerate a temporary tariff-related price increase. Unless broader inflation or expectations rise, Canadian rate markets may need to unwind some of their hawkish pricing.

USD/CAD has now tested the 1.3760 support area twice without closing below it. Thursday’s US producer prices and Friday’s CPI will guide Fed expectations and the next move in rate differentials. Softer inflation could push the pair through 1.3760, while a firm reading would bring 1.3820 to 1.3840 back into view. Beyond this week, further trade escalation would favour a weaker loonie as investors reassess Canada’s growth and policy outlook.

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Calendar: September 08 – 11

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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.