USD: Oil and rates keep the dollar supported
The US dollar remains well supported as markets balance renewed geopolitical risks against a still-resilient US economy. Brent crude has pushed higher after signs of further disruption in the Middle East, while concerns over global energy supplies continue to keep inflation risks elevated. With policy rates already restrictive, higher energy prices raise the prospect that the Fed may have to remain vigilant for longer, particularly if inflation expectations begin to drift higher.
Recent comments from Fed officials, combined with robust economic data, have reinforced the view that policy may need to stay restrictive. Chicago Fed President Austan Goolsbee highlighted the risk of overheating demand, while Chair Warsh has argued that the economy is proving stronger than many anticipated.
Markets are not fully there yet, but the direction is worth watching. Fed funds futures are moving closer to pricing a 70% probability of an October hike. If expectations continue to build towards that level, the Fed could find itself under increasing pressure to validate market pricing. Failing to do so risks a sharp repricing lower in yields and an easing of financial conditions that policymakers may view as inconsistent with their inflation objectives.
Looking ahead, oil is likely to remain a key driver this week. Markets are also watching President Trump’s discussions with Gulf representatives alongside the UN General Assembly. Trump is also due to meet Chinese President Xi Jinping in Washington on Thursday.
Bottom line: stronger data, firmer oil and rising long-end yields continue to favour the dollar. The closer markets move towards fully pricing another Fed hike, the harder it becomes for policymakers to ignore.
EUR: Looking to geopolitics for some reprieve
The euro traded relatively flat yesterday. Perhaps most notable was its weakening against CEE currencies. Prospects for diplomatic talks aimed at addressing the Middle East conflict this week lifted risk sentiment, to which the region is particularly sensitive.
EUR/USD edged lower, but we wouldn’t read too much into it. The Fed’s hawkish dominance came back into focus after the BoJ under-delivered on its hawkish expectations on Friday, likely providing some delayed support to the dollar into this week. There’s nothing fundamentally new here: a hawkish Fed continues to underpin the dollar, but with much of this already priced, it would likely take a material move higher in oil to drive more meaningful USD upside.
For this week, we will be monitoring news flow closely as several high-profile meetings take place in New York at the UN headquarters, including talks between President Trump and Gulf leaders, as well as President Trump’s meeting with Xi. Should de-escalation momentum consolidate further as all sides push for a diplomatic resolution, we would expect further declines in oil prices and modest upside potential for EUR/USD. For now, 1.1450 looks to be an important area of short-term support.
GBP: Quiet start, technical pressure remains
Sterling has started the week on a relatively subdued footing, with performance across the G10 reflecting a mix of competing global forces. The pound is modestly firmer against several European peers, but weaker against parts of the APAC complex as investors continue to favour higher-beta currencies amid resilient risk sentiment.
The bigger picture remains largely unchanged. Last week’s labour market and inflation data, followed by the BoE’s decision to leave rates unchanged, reinforced the view that the UK is facing a combination of cooling domestic demand and energy-driven inflation. Markets continue to price an aggressive tightening path over the next 18 months, leaving sterling vulnerable should those expectations ultimately prove too hawkish.
For now, there is little fresh domestic news to alter that narrative. Instead, investors remain focused on global bond yields, Middle East developments and oil prices, which continue to exert a significant influence on sterling’s direction.
Technically, GBP/USD remains under pressure after breaking below key moving-average support in the low-1.34s. A move beneath the lower Bollinger Band and an oversold RSI highlight the intensity of the recent sell-off. The 100-week moving average near 1.32 remains the next major downside reference point.
Meanwhile, GBP/EUR continues to drift around the mid-1.16s. The pair’s 100-day moving average, which spent much of the spring and summer rising, has now flattened and may increasingly act as a centre of gravity for price action.
Looking ahead, flash PMIs later this week are the main domestic event risk, although the pound’s direction is still likely to be dictated primarily by global rates, risk sentiment and the energy backdrop.
Market snapshot
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Calendar: September 21-25
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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.
