USD: Sentiment meets fundamentals
The US dollar is set to close Q3 nearly 1% higher. The key shift we’ve observed this quarter is a realignment of DXY price action with US macro fundamentals. While these fundamentals no longer support the dollar as strongly as they did earlier in the year – when a hawkish Fed dominated the narrative – the bearish pressure they now exert is more diluted. Tariff-related headline risks have faded, and the dollar no longer reacts with the same abruptness to negative developments.
Even so, despite more moderate price swings, the dollar’s sensitivity to macro data has taken on a more volatile character in today’s environment. This reflects a reconciliation between sentiment – how investors perceive and position around a currency – and underlying fundamentals. Upside macro surprises are being scrutinized more closely, and with expectations skewed toward weaker growth or higher inflation, the resulting price reactions are more pronounced when reality diverges from consensus.
The Fed’s unexpectedly hawkish tone at its latest meeting is a clear example. Markets had priced in a more dovish stance, largely in response to soft labour market data. When the Fed pushed back with a firmer message, positioning adjusted sharply. The dollar reversed pre-meeting losses (~1%) and ended the week roughly 0.1% higher.
Looking ahead, alongside PMI releases, the key event this week is the personal consumption expenditure (PCE) report – the Fed’s preferred inflation gauge. A downside surprise could pressure the dollar lower, reinforcing the view that tariff-related inflation is transitory rather than structural. Still, we expect the greenback to hold above the 97 level.
EUR: Euro needs a villain
Last week marked a complete reshuffling of rate expectations, shifting from disfavoring to favoring the common currency. The ECB appears to have ended its easing cycle, while the Fed is just beginning its own – cutting rates for the first time this year.
This locked-in advantage is likely to play out in the months ahead, primarily on the USD side. Expectations of further Fed easing should support EUR/USD, though the upside may be limited, as two additional cuts – likely the furthest the Fed could go this year – are already largely priced in. EUR/USD seems to be consolidating around the 1.17 level, which it struggled with throughout most of the summer but now appears better supported following recent rate dynamics. That said, with little the eurozone can offer to lift the euro, the currency remains increasingly reliant on negative US data to maintain upward momentum.
There isn’t much on the eurozone calendar this week, except for PMIs at both the country-specific and eurozone levels. Meanwhile, a soft US PCE reading could prompt EUR/USD to retest the 1.18 zone.
GBP: Sterling momentum fades as fiscal risks loom
Sterling endured some choppy price action last week as investors digested a heavy run of data and policy signals. GBP/USD briefly pushed through $1.37 to a two‑month high, supported by the Fed’s rate cut and persistently firm UK wage and services inflation, which reinforced the Bank of England (BoE’s) cautious stance and underlined ongoing policy divergence. However, the move quickly faded, with the pair slipping back below $1.35 despite the BoE holding rates steady – an indication that upside momentum may be waning even amidst sterling’s yield advantage. Options markets echo this caution, with risk reversals continuing to show a bias toward GBP‑negative positioning further out the curve.
Sterling sentiment was further dented by August’s public borrowing figures, which came in at £18.0bn—well above expectations and the highest August print in five years. The data reignited fiscal concerns and weighed on the currency. Against the euro, GBP/EUR remained confined to a narrow €1.1450–€1.16 range, reflecting aligned rate expectations and limited macro divergence. Elevated front‑end yields continue to provide some support, but upside remains capped by stagflation risks, fiscal uncertainty, and slowing growth momentum.
Looking ahead, the near‑term direction for sterling will hinge on incoming data and broader risk appetite. This week’s flash PMI releases will be closely watched for signs of resilience or further softening in activity, while the Nov. 26 Autumn Budget looms as the next major domestic risk event.
BoE hawkishness fails to fuel sterling’s upside
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 22-26
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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.
