USD: Dollar at one-month high, eyes geopolitical developments
The US dollar index rose around 1% last week after the Fed delivered a 25bp rate hike and signalled that another increase remains possible before year-end. The index touched a one-month high and is now consolidating near the low-100s.
This week’s focus is likely to be driven more by geopolitical developments than economic data.
Over the weekend, US and Chinese officials began talks in New York ahead of Thursday’s summit between Presidents Trump and Xi. High on the agenda will be preserving the fragile trade truce between the world’s two largest economies, although the Middle East conflict and AI-related tensions are also expected to feature prominently. China remains Iran’s largest trading partner, while technological competition is adding another layer of complexity to bilateral relations.
With the current trade truce set to expire in November, Washington may have an incentive to adopt a more conciliatory stance towards de-escalating tensions in the Middle East, particularly with regard to the economic pressure campaign against Tehran.
Attention will also turn to the UN General Assembly in New York, where leaders of the six Gulf states are expected to meet President Trump on the sidelines of the gathering as part of a coordinated push to end the conflict. Trump also told Fox News on Sunday that he would be open to meeting Iranian President Masoud Pezeshkian, who is expected to attend the UN meetings.
We suspect these developments could help revive de-escalation momentum this week, supporting risk sentiment while putting downward pressure on energy prices. That would likely limit further hawkish repricing in rates markets and, in turn, cap upside in the US dollar. The 100.50 level looks like resistance over the coming days.
EUR: Politics moves up the euro agenda
Germany’s ruling party, the Christian Democratic Union (CDU), suffered its worst-ever result in a state election in Mecklenburg-Western Pomerania on Sunday, finishing a distant fifth as Alternative for Germany (AfD) emerged as the largest party. The defeat adds to the CDU’s heavy loss to AfD in Saxony-Anhalt just two weeks ago.
Merz’s party secured 4.9% of the vote, narrowly missing the 5% threshold required to enter the state parliament and losing representation in the region for the first time in its history.
The latest setback has intensified pressure on the Chancellor, with some within the party reportedly questioning his leadership just 16 months into his chancellorship.
The euro showed little reaction to the news, perhaps reflecting the lack of a clear political alternative capable of forming a federal government today. Nevertheless, the result adds to what is becoming a key theme for the eurozone: political instability, with France also facing heightened political scrutiny ahead of the 2027 presidential election.
As geopolitical risks recede, 2027 risks becoming a year in which domestic politics weighs more heavily on the euro.
For this week, the data calendar is relatively light, with September’s preliminary PMI releases and Germany’s Ifo survey the main highlights. The focus will be on whether economic activity remains resilient despite the intensifying energy shock over the summer months.
GBP: BoE recedes, global forces dominate
Sterling’s recent weakness is a result of the global backdrop and domestic developments. Last week’s BoE meeting reinforced the now familiar trade-off facing policymakers: a cooling labour market on one side, and energy-driven inflation on the other. While the BoE maintained a cautious stance, markets continue to price an aggressive tightening profile, leaving the biggest risk to sterling one of dovish repricing rather than further hawkishness.
That leaves GBP increasingly tied to global rates, oil prices and risk sentiment. Rising energy prices and ongoing Middle East tensions continue to influence market thinking, while bond yields remain elevated across developed markets. For a high-beta currency like sterling, the recent deterioration in risk appetite has proved unhelpful.
Technically, the picture has also deteriorated. GBP/USD has broken below a cluster of key daily moving averages in the low-1.34s, opening the door towards the 100-week moving average near 1.32. A break below the lower Bollinger Band and an oversold RSI highlight the strength of the recent sell-off. That suggests downside momentum may be becoming stretched, but oversold conditions can persist in trending markets and therefore do not, by themselves, argue for an imminent rebound.
Meanwhile, GBP/EUR has drifted back towards the mid-1.16s. The pair’s 100-day moving average, which spent much of the spring and summer trending higher, has now flattened and increasingly looks set to act as a centre of gravity for price action.
Looking ahead, flash PMIs are the main domestic event risk this week, although developments in the Middle East and the direction of oil prices are likely to remain the dominant drivers of sterling.
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.
