USD: Dollar struggles to follow rates higher
The US dollar ended Wednesday almost unchanged around 98.8 after another unsettled session. Brent crude rose above $100 a barrel, fueling inflation concerns and pushing the 10-year Treasury yield to 4.83%, its highest close since October 2023. Yet The US dollar index (DXY) briefly fell to 98.59 and failed to recover above 99. Yen strength and persistent concerns over US policy continue to dilute the support from oil and higher yields.
That reaction marks a clear change from March, when an oil rally briefly lifted the dollar through stronger US terms of trade. This time, sharp moves in the yen and a renewed US policy premium have clouded the signal from oil and yields. Higher energy costs are also threatening growth while keeping inflation elevated. As a result, investors are reluctant to treat higher yields as macro support to buy dollar.
Rate markets have nonetheless moved closer to a September Fed hike. The two-year yield closed at 4.42%, while markets now assign roughly a 60% chance to a hike next week. At the same time, the dollar’s subdued response shows that traders remain unconvinced the Fed will act. Thursday’s PPI and Friday’s CPI will provide the final major inflation signals before the September 15 and 16 meeting.
The ECB decision adds another layer to the outlook. A hawkish increase could strengthen the euro and weigh on DXY, given the euro’s large weight in the index. Further yen gains would add pressure, while any escalation in the Middle East could keep oil and Treasury yields elevated. However, a longer energy shock may hurt the dollar if investors focus on weaker growth and tighter financial conditions.
The DXY remains on fragile ground below 99, with immediate support near 98.50 and resistance around 99.20. Strong inflation data could push Fed hike expectations higher and lift the index toward 99.70. Softer readings would weaken the case for action next week and expose the 98.00 area. Until inflation settles the policy debate, the disconnect between the dollar, rates and oil is likely to remain in place.
EUR: Will the ECB justify market pricing?
EUR/USD has held up remarkably well despite the recent rebound in oil prices, highlighting how the market narrative has evolved since the early stages of the Middle East conflict. Back then, rising energy costs were viewed primarily through the lens of a eurozone growth shock and terms‑of‑trade deterioration. Today, rate differentials are back in the driver’s seat, helping explain why the euro has remained resilient even as commodity prices have moved higher.
That resilience owes much to expectations that the ECB will deliver a widely anticipated 25bp rate hike today, taking the deposit rate to 2.50%. The move has effectively been pre‑announced and is fully priced, while markets continue to discount almost two further hikes by the end of 2026. Together with improving eurozone growth momentum, that hawkish backdrop has helped underpin the euro in recent weeks.
The risk is that the ECB struggles to justify the degree of hawkishness already priced by markets. While energy prices have risen, broader inflation spillovers remain limited, giving policymakers room to remain cautious. Any emphasis from President Lagarde on data dependency or the need to assess incoming information before tightening further could trigger a modest dovish repricing and weigh on the euro.
That matters because ECB expectations have been an important pillar of support for EUR/USD this year. If that pillar starts to weaken, the euro may find it harder to offset the influence of US rates and Fed policy, which continue to be the dominant drivers of the pair.
Adding to the caution, recent eurozone resilience may prove difficult to sustain. Higher energy costs are once again squeezing real household incomes, raising the risk that growth momentum softens in the months ahead despite the recent run of stronger data.
GBP: GDP in focus tomorrow morning
Sterling has been relatively quiet since yesterday, reflecting a broader lack of conviction across FX markets. GBP/USD remains anchored around the mid-1.35s, while GBP/EUR continues to hover in the upper 1.16s, leaving the pound largely at the mercy of external developments rather than domestic headlines.
Near-term attention now turns to two key events. For GBP/EUR, today’s ECB meeting will be pivotal, with markets keen to assess whether policymakers validate recent expectations for further tightening. Meanwhile, tomorrow’s US inflation report is arguably the week’s most important release for broader FX markets, given its influence on Fed pricing and, by extension, the dollar.
The main UK event comes earlier tomorrow with the latest GDP figures. On the surface, the UK economy has performed impressively this year, with output expanding at an annualised pace of around 1.7% in the first half of 2026, making it one of the strongest performers in the G7. However, we’ve recently been warning that seasonality tends to flatter UK growth in the first half of the year.
The concern is that this strength fades as 2026 comes to an end. The unwinding of those seasonal effects is coinciding with a renewed squeeze on real household incomes from higher energy costs following the Middle East conflict. As a result, there is a risk that growth figures for July disappoint tomorrow morning.
For sterling, that creates an important test. A stronger reading would help justify the roughly three rate hikes currently priced by summer 2027. However, any evidence that growth is losing momentum could trigger a dovish reassessment of those expectations, eroding sterling’s yield advantage and leaving the pound more vulnerable to downside pressure.
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Calendar: September 07-11
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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.
