USD: Reflation trade keeps the dollar supported
The US dollar remains broadly supported as markets continue to lean into a global reflation narrative. While softer consumer sentiment and a weaker-than-expected JOLTS report yesterday pushed October Fed hike pricing back below 50%, and sent short-end yields lower, the broader rates backdrop remains constructive for the US currency.
The Treasury market remains central to the story. Ten-year yields have broken higher, leaving the 5.32% peak from 2007 back in focus. Importantly, yields are rising despite softer pockets of consumer data, suggesting investors remain more concerned about inflation, supply dynamics and robust investment demand than any imminent slowdown.
Recent US data reinforce that picture. Dallas Fed manufacturing survey data pointed to strong activity and rising price pressures, while business demand remains supported by AI-related capital expenditure. Consumer data are more mixed. Confidence remains weak and JOLTS job openings fell more than expected, while the quits rate held at 1.9%, indicating limited wage acceleration. The emerging picture is one of a bifurcated economy: softer consumers alongside resilient investment and corporate spending.
For FX markets, the implications remain supportive for the dollar. Markets continue to build expectations for further Fed tightening, helped by stronger data, higher energy prices and a notably hawkish roster of Fed speakers this week. Unless core PCE or payrolls materially disappoint, there is little reason for policymakers to push back against that pricing.
Bottom line: rising yields, firm growth and persistent inflation risks continue to underpin the dollar.
EUR: Fair value gap widens
EUR/USD hit a 13-month low yesterday, extending a bearish trend that has gathered momentum throughout September as investors have become increasingly confident in a hawkish Federal Reserve. The Fed’s September rate hike helped ease concerns around Chair Kevin Warsh’s often elusive communication style and doubts over his inflation-fighting credentials.
In many ways, the hike appears to have been exactly what investors needed: action rather than guidance (or lack thereof). What is instructive is that pricing for additional Fed tightening has remained relatively subdued this week. Yet the dollar continues to strengthen, suggesting investors are only now buying into the Fed’s hawkish narrative with greater conviction.
We are somewhat surprised by the scale of EUR/USD’s decline. The pair appears quite undervalued relative to our short-term fair value estimate at this point. Part of that gap may reflect a Fed credibility premium that is not fully captured by traditional macro drivers, alongside higher oil prices and softer risk sentiment.
We believe the bar for further downside is becoming increasingly high. Unless incoming US data strengthens the case for another Fed move in October, EUR/USD would struggle to sustain its recent pace of decline.
Friday’s US jobs report will be an important test.
In Europe, attention turns to September inflation data from France and Germany today. Spain’s inflation print came in stronger than expected yesterday, while another sizeable increase is expected today. Friday brings the aggregate eurozone figure.
GBP: Politics meets resilience
Sterling has found some support after briefly touching a fresh three‑month versus the USD yesterday. Prime Minister Burnham’s conference speech generated plenty of headlines but very little market reaction. Neither gilts nor GBP showed any meaningful response to proposals ranging from pension reform to a potential long‑term rethink of the UK’s relationship with the EU.
Still, comments around potentially rejoining the EU coupled with stronger GDP figures have helped the pound rebound across the board this morning.
Burnham’s decision to fund new spending commitments through changes to the state pension triple lock, rather than through additional borrowing or tax cuts, also helped reassure investors that fiscal discipline remains part of the government’s agenda. That said, markets remain more focused on next month’s Autumn Budget than on policy ideas that may take years to implement.
There was also some support for sterling from this morning’s GDP figures. UK growth accelerated to 0.5% in the second quarter, beating expectations and reinforcing the view that the UK economy remains surprisingly resilient despite elevated energy prices and geopolitical uncertainty.
But overall, the pound’s recent rebound may still owe more to the external backdrop than domestic developments. Expectations of a looser fiscal stance have eased, but markets remain primarily focused on global rates, energy prices and the dollar – the latter has shown signs of exhaustion overnight due to receding Fed hike bets.
For now, the combination of a reduced political risk premium and unexpectedly resilient growth is helping support GBP. The bigger test still lies ahead. As the Autumn Budget approaches, markets will move from assessing Burnham’s rhetoric to judging whether his government’s fiscal plans add up.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: September 28 – October 02
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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.
