USD: Dollar and yields drift lower
Following July’s softer U.S. jobs report, markets have embraced a more upbeat global investment narrative – equities continue to push record highs, and FX carry trades remain in demand (helped further by easing volatility). Investors appear at ease with a 125–150bp Fed easing cycle unfolding without clear signs of recession. The consensus view for further dollar weakness into year-end looks reasonable. However, the cyclical and Fed-driven leg lower in the dollar could face scrutiny later this year if U.S. growth surprises to the upside – a scenario with historical precedent.
The US dollar index has slipped to an almost 2-month trough tracking Treasury yields lower as markets brace for Wednesday’s Fed decision. A 25bp rate cut is fully priced in, with a slim chance of a larger 50bp move following recent signs of labor market cooling. Investors will focus on the Fed’s updated macro projections – especially the rate path – with expectations leaning toward continued easing through year-end.
The vote split will also be closely watched, as a three-way division among FOMC members hasn’t occurred since 2019. Traders are also eyeing whether Stephen Miran’s confirmation as Fed governor will come in time to influence this week’s meeting.
Beyond the Fed decision, key U.S. data releases this week include Tuesday’s August retail sales and Thursday’s jobless claims and July TIC flows. Last week’s spike in claims briefly pressured the dollar, and the TIC data will be closely watched for signs that foreign investors may be moving from hedging to outright selling U.S. assets.
GBP: Pound trading at 2-month high
GBP/USD surged past $1.36 this morning, building on its strongest close since July 7, after the latest UK labour market data reinforced expectations that the Bank of England (BoE) will hold rates steady. The report showed wage growth remained elevated, suggesting inflationary pressures are still too persistent for the BoE to begin cutting rates.
Regular pay excluding bonuses rose 4.8% y/y in the three months to July – its slowest pace since May 2022 and down from 5.0% in the prior two months. The deceleration was broad-based, with wage growth easing in both the public (5.6% vs 5.7%) and private (4.7% vs 4.8%) sectors. While broadly in line with expectations, these figures remain well above levels consistent with the BoE’s 2% inflation target, reinforcing the case for a cautious policy stance.
The unemployment rate held steady at 4.7%, matching forecasts and marking its highest level since August 2021. Meanwhile, employment rose by 232k in the three months to July, following a revised 239k gain previously – suggesting continued resilience in hiring despite signs of softening demand.
Taken together, the data points to a labour market that is gradually cooling but still tight enough to keep wage-driven inflation risks alive. For the BoE, this likely supports a wait-and-see approach, with rate cuts remaining off the table for now. Markets now see limited scope for near-term easing, supporting further upside in GBP/USD as policy divergence with the Fed widen and UK fiscal concerns remain largely sidelined for the time being.
EUR: Policy split fuels euro rise
EUR/USD has started the week on a positive note, up 0.3%. Expectations of a distinctly dovish Powell this Wednesday are supporting the common currency, which – on the euro leg – has locked in firmly hawkish forward guidance. And ECB official Isabel Schnabel spoke today, warning that food inflation is picking up again, posing risks to consumer expectations. She also noted a strong rebound in domestic demand despite a challenging global environment and reaffirmed the ECB’s medium-term price stability outlook. Her remarks echoed – and reinforced – the hawkish tone set by Christine Lagarde a week earlier.
While a rate cut is fully priced in for the Fed this week, it’s the forward guidance and updated projections that are exerting further dovish pressure on the greenback. Signs of more aggressive easing than anticipated could push EUR/USD into the 1.18 zone, allowing the pair to reclaim its July highs of 1.1829.
On a final note, as expected markets appear to be discounting political risk tied to France, despite recent yield flare-ups following Fitch’s downgrade. The turmoil remains a France-specific concern and, for now at least, seems to have little impact on FX. Moody’s and S&P are expected to follow suit on 24 October and 28 November, potentially downgrading France’s AA status.
Sterling stretches higher across the board
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 15-19
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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.
