Written by Convera’s Market Insights team
Dollar’s rebound might be short-lived
George Vessey – Lead FX Strategist
The US dollar index scored its biggest daily rise since June on Wednesday as the yield on the 10-year US Treasury note rose past the 3.8% mark to its highest in three weeks. However, with the soft landing narrative still intact and markets continuing to favour more aggressive rate cuts by the US Federal Reserve (Fed), the path of least resistance for the dollar looks to be lower in the short term.
Another catalyst which should in theory be dollar negative is the stimulus being pumped by China. Investors got a fresh boost of optimism from news of a possible capital injection ($142bn) into China’s top banks in addition to several support measures announced earlier this week. This should continue to buoy risk-sensitive currencies, including GBP, but also commodity linked FX such as the AUD, CAD and NOK. The EUR, which has China as its largest trading partner, should also benefit. Hence, overall, this should keep dollar bulls on the backfoot. Meanwhile, on the macro front, economic data was sparse yesterday, but we saw US mortgage applications surge for a second week to a new 2-year high. Demand rose in line with the continued drop in benchmark mortgage rates with a 30-year fixed contract easing to a two-year low as the outlook of a dovish Fed kept the yield on long-term Treasuries in check.
Today, focus will be on US GDP data and weekly unemployment claims, whilst the Fed’s preferred measure of inflation, the core PCE deflator, is due tomorrow. A low reading, such as 0.1% m/m could deliver a fresh leg lower in the dollar.
Pound pulls back as expected
George Vessey – Lead FX Strategist
Apart from escalating geopolitical tensions, there have been no obvious news triggers driving the pullback in sterling from over 2-year highs. But as we noted yesterday, the technical setup pointed towards this happening having reached overbought conditions against both the euro and US dollar, according to the Relative Strength Index (RSI) readings on the daily charts.
The daily decline in both exchange rates has already dragged them out of the overbought zone though, with the RSI back into the equilibrium band. Growth and yield differentials continue to provide a bullish outlook for the pound at this stage with $1.35 on GBP/USD a potential upside target in the short term. The pound’s high beta to risk also puts it in a favourable position so long as global risk appetite remains upbeat. For now, this appears likely given the stimulus measures announced by China. Nevertheless, with the US election just over a month away, safe haven dollar demand could start picking up given the elevated uncertainty about the outcome.
Against the euro, sterling is poised to record its seventh monthly gain in a row. This would be its longest ever monthly winning streak against the common currency. But as we have quarter end this week, we could see some erratic price action driving FX, as portfolio managers rebalance their books.
Euro rejected at $1.12 for second time in 2024
Ruta Prieskienyte – Lead FX Strategist
Amid quarter-end flow-induced volatility, the euro briefly touched $1.1214, its highest level since July 2023. However, this threshold again proved unsustainable, with EUR/USD trading above the $1.12 level for only six sessions over the past 30 months. The pair ultimately closed lower on Wednesday, though it remained the best performer across the G10 currencies. Bunds fell the most in a week, led by the belly of the curve, as money markets pare ECB wagers on terminal rates. While year-end rate cut bets remained steady, traders trimmed as much as 8bps from next year’s meetings.
European equities posted losses for a second consecutive day, with the Stoxx50 struggling to breach the 4950 level. A month ago, we highlighted the risk of equity market fatigue, suggesting that 5000 could act as a ceiling for potential gains, a scenario that has materialised. Despite a 7% rebound since the August trough, European equities remain in a broad downward-trending channel since the May peak, driven by deteriorating macroeconomic fundamentals, which have made euro-denominated assets less attractive. Looking ahead, the market enters a period that has historically seen sharp downturns in equity performance, potentially acting as a headwind as we enter Q4.
In terms of other euro crosses, the common currency appreciated against all G10 peers except the US dollar. The euro saw the strongest gains against high-beta commodity currencies such as NOK, NZD, and AUD. EUR/SEK rose by over 0.4%, rebounding from a near three-month low after the Riksbank lowered its key policy rate by 25 bps to 3.25%, signalling further potential cuts. Central bank projections suggest one or two additional cuts in early 2025, contingent on inflation and economic conditions. Until the ECB clarifies its stance on the October meeting, where policymakers have resisted a back-to-back rate cut, but the market has priced in a 60% probability, EUR/SEK may continue to trend higher, especially with RSI near oversold levels.
Oil down over 4% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 23-27
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.
