USD: Three tailwinds for the dollar
The US dollar is back in demand as, firmer energy prices, softer risk sentiment and another run of strong US data reinforce its relative appeal.
Brent is up more than 2% after attacks forced Saudi Arabia to shut a major crude pipeline, while talks aimed at securing temporary passage through the Strait of Hormuz have been postponed. The renewed energy shock is adding to inflation concerns and keeping global bond markets under pressure, with global yields ushing to fresh multi-decade highs.
Risk sentiment is deteriorating further as renewed doubts around the AI trade compound the energy shock. Major industry leaders have called for a slower pace of cutting-edge AI development amid mounting safety, cybersecurity and governance concerns, raising fresh questions over the speed of future investment and returns from an already highly valued sector. Nasdaq futures are down around 1.3%, while Korea’s tech-heavy Kospi has fallen more than 3% and Asian equities are broadly weaker.
That combination of higher oil and softer equities is restoring some of the dollar’s traditional safe-haven appeal.
Crucially, the rates channel is working in the same direction. Strong jobs data and hotter August inflation have forced a sharp hawkish repricing of Fed expectations, strengthening the case for a 25bp hike this week and lifting real yields.
A hike would validate the recent rates move and likely extend USD strength, although it would also sharpen tensions between Chair Warsh’s inflation mandate and President Trump’s preference for lower rates.
EUR: Pressure is building below 1.16
The euro proved surprisingly resilient last week despite oil prices surging to their highest levels since May. The ECB’s hawkish hike helped offset this headwind. However, with markets already pricing two further ECB hikes by April 2027, there appears limited scope for the rates channel to provide much additional support for the euro, particularly while the pass-through from higher energy costs into broader inflation remains contained.
Today, we’ve already seen the euro’s resilience tested. EUR/USD has slipped further below 1.16, falling around 0.4% to its lowest level in a month, as higher energy prices, weaker risk appetite and increasingly dollar-supportive rate differentials converge.
Although higher oil prices can initially support ECB tightening expectations, beyond a certain point – the negative implications for eurozone growth and terms of trade begin to dominate. At the same time, souring risk sentiment naturally favours the dollar through the safe haven channel, leaving the euro increasingly squeezed from both sides.
With the Fed meeting now approaching, relative rate expectations are likely to remain the dominant driver. Unless energy prices retreat or risk sentiment improves, EUR/USD looks vulnerable to extending its recent decline, with last week’s resilience increasingly giving way to renewed downside pressure.
GBP: Pound awaits hawkish nudge
This week is a key test for the pound. A more actively hawkish BoE bias has yet to materialise, despite higher energy prices pushing short-end rates higher. The BoE is still widely seen as reluctant to hike, partly due to a soft labour market, little pass-through from higher energy prices, and well-anchored long-term inflation expectations.
That said, oil prices are now significantly higher than they were ahead of the July policy meeting, on which the BoE’s latest projections were based. Combined with tomorrow’s UK CPI release, expected to rise to 3.1% from 2.9% in July, that could encourage markets to take the recent hawkish repricing more seriously. Much, however, will depend on the tone struck at the MPC press conference.
A hawkish hold that hints at a possible rate hike ahead would help underpin sterling in the near term. We remain sceptical that the BoE will ultimately follow through, however, as policymakers are unlikely to validate the aggressive tightening currently priced by markets (3 hikes by April 2027).
Beyond the MPC, sentiment towards the pound will become increasingly important as the Budget approaches. So far, the fiscal news flow has been relatively benign, giving GBP bulls little reason to walk away from a currency that continues to offer some of the highest yields in the G10.
GBP/USD remains stuck in the 1.35-1.3550 range, with mild downside risks should the Fed deliver a hike this week. A firm UK inflation print and hawkish BoE rhetoric could help offset some of that pressure.
As for GBP/EUR, we see scope for the pair to firm above 1.1650 if inflation comes in hot and the BoE delivers a hawkish hold.
Market snapshot
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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.
