USD: Dollar finds support in Fed and fear
Our expectation this week was that a largely priced-in Fed hiking path, a light data calendar, and renewed hopes of de-escalation from a string of high-level meetings would keep dollar gains in check.
We were wrong. The dollar index is up around 1% on the week. A steady stream of FOMC speakers signalled that further tightening may still be warranted, pushing the implied probability of an October hike to around 72% from 55% and lending support to the dollar. A blowout preliminary September S&P PMI release added further momentum to the move.
But the bigger driver was geopolitics. So far, a packed week of high-stakes meetings has produced no concrete signs of a swift end to the conflict or the reopening of the Strait. Risk aversion dominated, dragging both Treasuries and equities lower. Brent crude has rebounded to $105/bbl after briefly dipping below $100 earlier in the week.
Reports yesterday that US and Iranian officials are exploring a phased path out of the conflict has done little to improve sentiment for now. That underlines the market’s deep scepticism about de-escalation prospects and, by extension, the risk that central banks may need to stay hawkish for longer.
Against this backdrop, the dollar still has room to extend gains. Whether it does will depend on incoming US data releases, with next week’s jobs report a key test, but above all on whether de-escalation hopes translate into tangible progress.
DXY has approached the 101.25-101.50 zone, a zone last seen in June and July.
We would expect some consolidation around these levels before fresh data or geopolitical developments either reinforce or unwind expectations for an October Fed hike, ultimately determining whether the dollar breaks higher or pulls back.
EUR: Resilient eurozone, relentless US dollar
EUR/USD is heading for its worst month since June, when Fed Chair Kevin Warsh delivered his hawkish debut. The pair is down ~2% month-to-date and hovering near two-month lows.
This week may have served as a reminder that meaningful progress towards ending the Middle East conflict remains elusive, in turn helping validate the Fed’s hawkish stance as a key driver of FX markets.
Elsewhere, eurozone sentiment indicators continue to surprise to the upside, highlighting economic resilience despite geopolitical tensions and domestic political uncertainty. Alongside the S&P PMIs earlier this week, yesterday’s German Ifo survey added to evidence of solid underlying momentum.
The headline Ifo business climate Index rose for a fifth consecutive month, to 89.9 from 88.8 (est. 89.0). The current assessment component increased to 89.5 from 88.5 (est. 89.0), while expectations climbed to 90.4 from 89.1 (est. 89.3).
Much of the strength likely reflects the government’s sizeable fiscal stimulus on defence and infrastructure, which is finally starting to filter through to the economy and offset some of the drag from higher energy prices.
The data did little to strengthen the case for an ECB hike in October. The Bank has already tightened twice and may be reluctant to push rates higher at the expense of growth. Nonetheless, the figures reinforce the ECB’s hawkish bias and its willingness to tighten further should oil prices remain elevated.
That leaves the focus squarely on the Fed as the main short-term driver of EUR/USD. Until the Fed path becomes clearer, we would expect consolidation around 1.14.
GBP: Weak data, weaker price action
It’s been a tough week for sterling, with the pound lower against every G10 currency bar the AUD. The biggest losses have come against the US dollar, where GBP/USD is down more than 1.2% on the week, reflecting a combination of surging global yields, softer risk sentiment and renewed demand for the US currency since the hawkish Fed hike.
The domestic backdrop has done little to help. Three themes stand out. First, markets continue to price an aggressive Bank of England tightening path despite policymakers appearing far less convinced. Second, labour market conditions are cooling. Third, elevated energy prices threaten another squeeze on real incomes heading into winter.
The first two concerns showed up clearly in this week’s PMI data. The UK composite PMI slipped to a three-month low of 51.7, missing expectations and marking one of the first meaningful downside surprises after a prolonged run of positive UK data. In contrast, eurozone activity continued to improve, helping explain sterling’s underperformance against the euro, with GBP/EUR breaking below its 100-day moving average for the first time in several months.
Looking ahead, sterling’s outlook doesn’t look bright. We continue to expect the UK’s data pulse to soften into year-end as higher energy costs, a deteriorating trade backdrop and shrinking fiscal headroom weigh on activity.
The technical picture has also deteriorated. As highlighted earlier this week, GBP/USD’s break below key moving averages in the low-1.34s opened the door to the 100-week moving average near 1.3240, a move that has already played out. A weekly close below that level would be a notable bearish development, raising the risk that recent weakness evolves from a correction into a broader downtrend.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
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.
