USD: For the US dollar, it’s hike or nothing
The dollar index (DXY) closed higher for a fifth consecutive session yesterday, its longest winning streak since June, when newly appointed Fed Chair Kevin Warsh delivered a hawkish debut at his first post-meeting press conference.
A Fed hike today is priced with near certainty, with the recent surge in oil prices helping cement that view. Markets may not be expecting much from Warsh’s communication itself, focusing instead on the decision and the data. Upward revisions to the PCE projections, along with the vote split, and dot plot should command market attention and could fuel further dollar strength even before Warsh takes the podium.
Watch the vote split closely. A chunky dissenting contingent could undermine the perception of a Fed united against inflation, limiting the scope for a more durable dollar rally. That risk is amplified under new leadership, with the Fed’s inflation-fighting credentials facing heightened scrutiny. Williams and Waller may well be among the dissenters given their recent benign view of underlying inflation.
Overall, we remain bullish on the dollar into tonight’s meeting. Warsh may add to the move, but if he doesn’t, the dollar should not suffer much. After all, he effectively signalled support for a hike at Jackson Hole. At this point, markets are not looking for fresh guidance from him. They are simply looking for delivery.
The DXY appears to be consolidating near its early-September highs around 99.700 ahead of tonight’s decision. A break above this level, with 100.00 clearly in sight, is a distinct possibility today.
EUR: Euro downside risks building
The balance of risks is tilting lower for EUR/USD. The pair broke below its 100-day moving average earlier this week and is now testing the 50-day gauge, as markets reassess the eurozone growth outlook and relative ECB-Fed policy paths.
Energy remains the key vulnerability. Oil has risen almost 50% this quarter, alongside renewed pressure on European gas prices. The eurozone has absorbed the shock remarkably well so far, while EUR/USD’s correlation with energy has weakened. But that resilience has limits. A prolonged energy squeeze would increasingly weigh on growth and undermine the euro, particularly if broader risk sentiment continues to deteriorate.
Adding to the pressure is rising bond-market volatility. The MOVE index has pushed higher alongside global yields, historically an unfavourable combination for EUR/USD.
The problem for the euro is not just because rates volatility is rising as yields surge globally, it’s also how this impacts relative policy outlooks. Having lifted rates toward the upper end of neutral, the ECB increasingly faces a growth-inflation trade-off rather than a simple inflation problem. That makes the roughly 90bp of tightening priced by September 2027 look vulnerable if activity weakens, with next week’s PMIs a key test.
Meanwhile, attention today turns to the Fed. A hike is largely priced, so the more important signal will come from Chair Warsh’s guidance on what follows. The hurdle for markets to unwind Fed tightening expectations arguably remains higher than for the ECB.
So, unless geopolitics improves materially, the combination of energy pressure, rates and equity volatility and an increasingly USD-supportive rate dynamics leaves EUR/USD vulnerable to a test of 1.15 this week.
GBP: Inflation lands, sterling waits
Sterling has taken August’s inflation report largely in stride, with the data landing broadly in line with expectations.
Headline CPI rose to 3.1% from 2.9% in July, its highest level since March. Core inflation, which strips out food and energy, held steady at 2.6%, while services inflation, a key gauge of domestic price pressures for the Bank of England, came in a touch softer at 3.4% versus expectations of 3.5%.
It comes as no surprise that fuel was the main driver behind August’s pickup in inflation, with higher energy costs feeding directly into the transport basket.
Both doves and hawks will find something to like. Doves can point to the lack of meaningful spillover into the broader CPI basket, suggesting underlying inflation pressures remain contained for now.
Hawks, meanwhile, will note that the Q3 2026 (partial) average for headline inflation currently sits at 3.0%, 0.1 percentage points above the Bank’s July forecast of 2.9%. But those projections were built on significantly lower oil prices seen in June and July. With crude seemingly finding a floor around $100 per barrel today, the inflation impulse from energy is unlikely to fade anytime soon and should become even more visible in September’s data.
We doubt today’s numbers are enough to justify a rate hike this week in the absence of updated forecasts. Still, the recent surge in oil prices and the prospect of upward revisions to the Bank’s inflation outlook could encourage a firmer hawkish tone at Thursday’s meeting.
Keep an eye on the vote split as well. The last decision came with a 6-3 majority in favour of holding rates, with calls for a hike gradually gathering support in recent months.
To GBP bulls’ frustration, markets already look heavily skewed towards the hawkish side, with as many as three rate hikes priced in by March 2027. That should limit the scope for any meaningful sterling gains if the Bank adopts a more aggressively hawkish stance this week.
For now, GBP/USD remains at the mercy of the Fed today, with 1.3450 as a key support to watch for this week. GBP/EUR, meanwhile, continues to trade comfortably in the upper 1.16s heading into Thursday’s BoE decision.
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Calendar: September 14-18
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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.
