USD: Oil fuels hawkish repricing, dollar looks for support
The bond selloff extended yesterday, pushing yields across developed markets to their highest levels in almost two decades.
Renewed tensions in the Middle East appear to be the main driver. The US and Iran have resumed tit-for-tat strikes following roughly a month of relative calm, sending oil prices higher and prompting investors to reprice the expected path of policy rates in a more hawkish direction.
The nature of the selloff is telling. A couple of weeks ago, long-end yields rose primarily after Treasury Secretary Bessent outlined plans to support bond market liquidity, reigniting concerns about fiscal sustainability. By contrast, the current selloff appears more concentrated in short-dated maturities.
The timing is consistent with that interpretation. The ECB is approaching another rate hike, while Kevin Warsh’s Jackson Hole remarks reinforced the Fed’s willingness to contain inflation through near-term policy adjustments.
The US dollar now has an opportunity to rebuild support from the hawkish Fed narrative, which has lost some momentum in recent weeks amid renewed debasement fears. Barring new announcements from Bessent or materially weaker data in the coming days, the dollar should be able to do so.
Nonetheless, a rate hike on 16 September may be the Fed’s most credible option at this stage if it wants to reinforce a more sustained transmission of higher rates into the dollar.
On the data front, the August ISM PMIs were relatively weak, despite a still-solid underlying trend. Manufacturing activity and new orders both came in below expectations and below July levels. The JOLTS report, a key labour market indicator, also disappointed. The job openings rate came in at 4.4% versus expectations of 4.5%, while July was revised down to 4.3% from 4.4%.
These releases are unlikely to materially alter the Fed’s reaction function. The focus remains squarely on inflation. Despite a softer hiring backdrop, the labour market still appears broadly healthy, a view that seems widely shared within the FOMC.
For today, we will be watching the ADP private sector employment report.
EUR: Eurozone inflation near 3-year highs, euro muted
August eurozone inflation came in at 3.3%, in line with expectations and up from 2.9% in July. The measure is now near a three-year high, underscoring the impact of higher oil prices driven by the conflict in the Middle East.
We also heard from several ECB officials. Gediminas Šimkus struck a notably hawkish tone, saying that a rate hike in September looks “very likely” and is unlikely to be sufficient to bring inflation back to target. Going further, however, would mean pushing the deposit rate into restrictive territory. Given the limited pass-through from higher energy prices so far, we would favour an extended ECB pause after September, pending evidence of broader spillovers or a further escalation in tensions in the Middle East.
As expected, the common currency barely reacted to the inflation print, with a September hike already priced with near certainty.
EUR/USD looks poised for further near-term downside amid growing hawkish Fed expectations. Look for support at 1.1570, followed by 1.1520.
GBP: Sterling’s yield advantage risks narrowing
GBP/USD is testing 1.35 after several days of selling, amid the US dollar’s attempts to shrug off debasement fears and re-embrace the hawkish Fed narrative. GBP/EUR remains stuck in a 1.1650-1.17 range.
The Bank of England is seen as the least hawkish central bank in the developed market complex this month, with markets betting that it will remain on hold on 17 September.
Should the Bank be the only major central bank to refrain from hiking, sterling’s carry appeal as a G10 currency with one of the highest policy rates would take a hit. Despite a backdrop that is not particularly supportive for the pound, its relatively high rates have made it attractive from a carry perspective, helping keep it supported in a low-volatility environment. Further tightening by peer central banks would narrow that rate advantage.
This is not to suggest that sterling will lose its position as one of the preferred currencies within the G10 complex. After all, it remains one of the most liquid currencies and an attractive option within the developed market universe. However, it does suggest that, with political tensions likely to resurface ahead of the Autumn Budget, selling GBP may become less costly from a carry perspective and therefore more appealing to investors.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: August 31 – September 4
All times are in BST
Have a question? [email protected]
*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.
