Key Takeaways
- The US dollar rebounds after PCE and income/spending data, raising speculation on Fed rate hikes.
- Trade tensions push the Canadian dollar lower, which along with supportive US economic data, limit its recovery.
- The pound remains stable against a stronger dollar, supported by high UK yields and carry appeal, despite global risks.
- Markets await insights from Kevin Warsh at Jackson Hole, though he may retain his cautious/vague communication style.
USD: PCE gives the Dollar fresh momentum
The dollar has recovered about half of last week’s losses, with DXY trading near 99.24. July PCE inflation rose 0.2% on the month and 3.7% on the year, while underlying services inflation stayed firm. Personal income outpaced spending, giving households room to rebuild savings. The data did not settle the Fed debate, but it brought a year-end rate hike back into focus. Treasury yields moved higher, helping the dollar deliver its strongest daily gain in almost four weeks.
Attention now shifts to the tension between the Fed and Treasury. Secretary Bessent’s expanded buybacks have contained long-term yields, while persistent inflation supports tighter monetary policy. Markets want Kevin Warsh to clarify how the Fed will respond and where monetary policy ends and debt management begins. Traders have started protecting against another dollar rebound, but conviction remains limited. If Warsh avoids clear guidance, payrolls and CPI will take control of the September debate.
Hormuz diplomacy is pulling in the opposite direction. Iran and Oman have reportedly reached a revenue-sharing agreement, while regional oil flows continue to recover. Brent has fallen more than 7% this week to around $87 per barrel, easing pressure on inflation expectations and safe-haven demand. However, restrictions on military vessels and fresh threats against non-compliant ships leave the route exposed to renewed disruption. For the dollar, lower oil provides a modest headwind.
DXY now faces resistance at 99.50, followed by the psychological 100.00 level. A hawkish Warsh speech could push the recovery through that zone and lift expectations for a September hike. A vague or cautious message could send the index back below 99.00, exposing the August low at 98.80 and potentially the May floor near 97.96. Initial jobless claims may create some movement today, but Jackson Hole remains the larger test. Warsh must either give the dollar a policy anchor or leave the next move to payrolls and CPI.
CAD: Trade risk checks Canadian dollar rally
The Canadian dollar has fallen to a one-week low as trade risk collides with renewed US dollar demand. USD/CAD has climbed toward 1.39 after Washington imposed 50% tariffs on selected Canadian goods and Ottawa promised dollar-for-dollar retaliation from September 8. The dispute has capped the currency’s recent recovery by reviving concerns over exports, investment and business confidence. Yet the selloff remains controlled because the US measures cover roughly 4.2% of Canadian exports to the United States, while more than 85% should continue to enter duty-free under CUSMA.
The latest US data supplied the second leg of the move. Headline PCE inflation rose 0.2% in July and 3.7% from a year earlier, while services inflation remained firm. GDP held at a 1.5% annualized pace, and durable goods orders beat expectations, although the underlying investment details were softer. The releases did not settle the September Fed debate, but they gave investors a reason to rebuild dollar positions after the currency’s recent retreat.
Interest-rate spreads now provide the cleanest guide to USD/CAD. The US-Canada two-year yield gap has widened from its post-payrolls low, restoring some support for the greenback. A clear hawkish signal from Fed Chair Kevin Warsh at Jackson Hole could extend the move above 1.39, although Warsh may retain his cautious/vague communication style. Canada’s second-quarter GDP report will test the other side of the pair by showing whether the spring rebound carried enough momentum into the tariff shock.
For now, 1.3900 is the dividing line. A sustained break above it could expose 1.4000 to 1.4100 as markets price a broader trade rupture or reconnect the US dollar with higher yields. A reversal below 1.3760 would put the 1.3500 to 1.3700 zone back into view. Trade tensions have weakened the Canadian dollar’s defence, but Fed policy and incoming growth data will determine whether this becomes a deeper slide or another contained setback.
GBP: Keep calm and carry on
The pound remains relatively well supported despite a backdrop that is hardly unequivocally sterling-positive. GBP/USD has slipped back below 1.36 as the dollar firms across the board following yesterday’s stronger US data and a modest pickup in safe-haven demand. However, the decline has been contained, highlighting that the broader uptrend remains intact for now.
Global factors continue to dominate. Geopolitical uncertainty, elevated oil prices and a somewhat underwhelming reaction to Nvidia’s latest earnings have kept risk appetite in check. As a high-beta currency, sterling typically performs best when investors are comfortable taking risk. Yet despite the more cautious tone, the pound has remained resilient.
One reason is the continued appeal of carry trades. UK yields remain high by developed market standards, even if expectations for additional Bank of England tightening have moderated. Investors can still earn a meaningful yield pickup by holding sterling relative to lower-yielding funding currencies, particularly the JPY, CHF and EUR. That support has helped prevent a deeper correction in GBP.
Against the euro, sterling has eased this week as the single currency benefits from a run of firmer eurozone data. Even so, GBP/EUR remains comfortably above its long-term breakout zone, suggesting recent weakness is more consolidation than reversal.
For now, the near-term outlook leans slightly softer as global risk sentiment remains fragile. However, with carry still attractive and UK yields elevated, any sterling weakness is likely to prove relatively shallow unless volatility picks up materially or investors begin to question the UK’s fiscal trajectory more aggressively.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: August 24 – 28
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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.
