US inflation in spotlight this morning

USD: Reflation trade keeps the dollar supported

The dollar remains well supported as markets continue to lean into a global reflation narrative. Higher commodity prices, resilient growth and persistent AI-related investment are combining to keep bond yields elevated, while concerns over fiscal deficits and heavy debt issuance continue to push up term premia.

The Treasury market remains central to the story. Ten-year yields have broken higher, leaving the 5.32% peak from 2007 back in focus. Importantly, yields are rising despite softer pockets of consumer data, suggesting investors remain more concerned about inflation, supply dynamics and robust investment demand than any imminent slowdown.

Recent US data reinforce that picture. Dallas Fed manufacturing survey data pointed to strong activity and rising price pressures, while business demand remains supported by AI-related capital expenditure. Consumer data are more mixed. Confidence remains weak and JOLTS job openings fell more than expected, while the quits rate held at 1.9%, indicating limited wage acceleration. The emerging picture is one of a bifurcated economy: softer consumers alongside resilient investment and corporate spending.

For FX markets, the implications remain supportive for the dollar. Markets continue to build expectations for further Fed tightening, helped by stronger data, higher energy prices and a notably hawkish roster of Fed speakers this week. Unless core PCE or payrolls materially disappoint, there is little reason for policymakers to push back against that pricing.

Bottom line: rising yields, firm growth and persistent inflation risks continue to underpin the dollar.

CAD: Rate differentials weighing heavy

USD/CAD trades at 1.4180, up over 2.0% in September,  its strongest monthly move in several months, and roughly 3% higher than the monthly low of 1.3760. The pair has been on a strong bullish run, climbing in 13 of the past 14 sessions and pushing into overbought territory on the 14-day RSI. Technicals point toward the 2026 year-to-date high of 1.4248 as the next key resistance.

The broader driver is USD strength: the US dollar index is on track for its best month since June, lifted by solid US economic data, elevated Treasury yields, and the Fed’s renewed inflation-fighting stance. August PCE data, the Fed’s preferred inflation gauge, is due later today and could be a near-term catalyst.

On the Canadian side, the macro backdrop is mixed-to-weak for CAD. Canada’s economy slowed in Q3, with GDP flat in July and up just 0.2% in August.  The Bank of Canada remains on hold, creating a significant rate gap versus the Fed that is weighing on the loonie.

EUR: Running behind fair value

EUR/USD hit a 13-month low yesterday, extending a bearish trend that has gathered momentum throughout September as investors have become increasingly confident in a hawkish Federal Reserve. The Fed’s September rate hike helped ease concerns around Chair Kevin Warsh’s often elusive communication style and doubts over his inflation-fighting credentials.

In many ways, the hike appears to have been exactly what investors needed: action rather than guidance (or lack thereof). What is instructive is that pricing for additional Fed tightening has remained relatively subdued this week. Yet the dollar continues to strengthen, suggesting investors are only now buying into the Fed’s hawkish narrative with greater conviction.

We are somewhat surprised by the scale of EUR/USD’s decline. The pair appears quite undervalued relative to our short-term fair value estimate at this point. Part of that gap may reflect a Fed credibility premium that is not fully captured by traditional macro drivers, alongside higher oil prices and softer risk sentiment.

We believe the bar for further downside is becoming increasingly high. Unless incoming US data strengthens the case for another Fed move in October, EUR/USD would struggle to sustain its recent pace of decline.

Friday’s US jobs report will be an important test.

In Europe, attention turns to September inflation data from France and Germany today. Spain’s inflation print came in stronger than expected yesterday, while another sizeable increase is expected today. Friday brings the aggregate eurozone figure.

Market snapshot

Table: Currency trends, trading ranges & technical indicators

Key global risk events

Calendar: September 28 – October 02

All times are in EST

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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.