USD: Iran delay keeps dollar rate support intact
Trump’s confirmation at the UN General Assembly that an Iran deal must wait until after the November midterms has reinforced the dollar’s consolidation. By anchoring energy prices at elevated levels for roughly seven weeks, this timeline strengthens the transmission from energy to inflation. That inflation impulse keeps the probability of a December Fed hike near 78% in OIS markets and has lifted the two-year yield to 4.76%. The resulting front-end rate support has pushed DXY to 100.68, its highest level since July, as markets price a Fed path that points to previous insurance cuts being unwound.
The Treasury curve’s compressed shape is also sustaining the greenback’s advance. With the 10-year yield pressing towards 5.00% while Secretary Bessent’s bond buybacks suppress the long end, the 2s10s spread sits at just 21 basis points. This flat curve signals confidence in the Fed’s policy credibility and preserves the dollar’s real-rate advantage. It also suggests that softer growth data would weigh on long-end yields before materially shifting front-end rates, limiting the currency’s exposure to negative macro surprises.
With energy risk keeping short-term rates elevated, the dollar’s sensitivity to incoming data is likely to remain low. The clearest threat to further dollar gains sits in Tokyo, where USD/JPY is trading near 157 following last week’s dovish Bank of Japan hike. Confirmed intervention by Japan’s Ministry of Finance at or above 160 could pull the dollar lower. While still a tail risk, intervention remains the most credible ceiling on near-term dollar gains, as it was the case back in July.
DXY is testing its session high near 100.7, with a clean break opening the path towards 101. On the downside, the intraday low at 100.3 and the 100.00 handle provide the key support levels. Barring a forceful move from Japanese authorities, the direction over the next seven weeks remains relatively clear. Elevated energy prices, a compressed yield curve and firm front-end rates should keep the dollar supported as rates stay higher for longer.
EUR: Limited support despite geopolitical progress
The euro continues to struggle to capitalise on improving geopolitical headlines. Progress in US-Iran negotiations and tentative optimism around Russia-Ukraine peace discussions have helped keep oil prices contained, yet EUR/USD remains below 1.15. For now, markets remain focused on rate differentials, which continue to favour the dollar following the Fed’s latest hawkish repricing.
Both the US and eurozone economies have shown resilience, but stronger US data and a firmer Fed narrative have pushed Treasury yields higher, leaving EUR/USD on the defensive despite expectations for another ECB hike next month.
Adding to the euro’s challenges is a growing layer of political uncertainty within Europe. Fiscal concerns in France and political debates around Germany’s economic and spending agenda have resurfaced at a time when investors are already questioning the region’s medium-term growth outlook. While not yet a dominant driver, the political backdrop is making it harder for the euro to attract sustained inflows when compared with the relatively straightforward rates story supporting the dollar.
Today’s flash PMIs will therefore be closely watched. A stronger reading would reinforce the view that eurozone activity remains resilient despite elevated energy costs and political noise. However, as recent price action has demonstrated, positive European data alone may not be enough to generate a sustained rally while markets remain laser-focused on relative rates.
For now, the near-term bias remains lower. While our baseline still envisages EUR/USD recovering toward 1.16 by year-end, the immediate risk remains a retest of the low 1.13s unless the Fed narrative softens or Europe delivers a stronger domestic catalyst.
GBP: Borrowing clouds Budget plans
Yesterday’s UK borrowing figures made for uncomfortable reading for the newly installed Burnham administration. The government borrowed £18.3bn in August, well above the OBR’s £14.8bn forecast, with the overshoot largely reflecting higher inflation-driven spending pressures linked to the conflict.
One month’s data does not make a trend, but the cumulative deficit has nevertheless risen to £77.3bn, £8.1bn above the level projected by the OBR in March.
Yet UK assets appeared largely unfazed. Gilts rallied alongside their peers as softer oil prices supported fixed income markets, while sterling traded in a relatively muted fashion.
Chancellor Hailey now faces the task of setting out the new government’s economic vision while convincing bond investors that the public finances remain under control. But with fiscal headroom already constrained, the scope for ambitious new measures may be limited, potentially forcing the government to prioritise cost-of-living support over more expansive initiatives such as devolution and large-scale housebuilding.
The irony is that a worsening backdrop could ultimately make the October Budget less harmful for UK assets. Before the conflict, markets were increasingly focused on how the government’s broader ambitions could be reconciled with fiscal discipline. The agenda looked ambitious, raising concerns over how far the government could push its priorities without unsettling investors.
Investors may still be wary of a deteriorating fiscal outlook, but a Budget centred on stability and targeted support rather than sweeping reforms could prove the more market-friendly outcome, helping to limit a more meaningful deterioration in both gilts and sterling.
That said, we would need to see more information leak out about the Budget’s contents before committing to this scenario.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: September 21-25
All times are in BST
Have a question? [email protected]
*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.
