Yen surge puts US Dollar on defensive

USD: Yen surge drives US Dollar lower

The yen is driving much of the dollar’s decline this morning. USD/JPY has fallen roughly 400 pips from its September 1 high to 156.21 as traders price a stronger chance of a Bank of Japan rate increase this month. Japanese officials also maintained their warnings over currency volatility, although central-bank accounts showed no evidence of intervention on Wednesday. Support near 156 may slow the move, but a firm break would add pressure on DXY through the yen’s heavy index weight.

On Wednesday, the US dollar had already pulled back to close at 99.59 following a string of weak labor prints throughout the week. ADP private payrolls added just 38,000 jobs in August, below forecasts and posting the smallest monthly gain since January 2026. Tuesday’s JOLTS report reinforced this soft trend, showing job openings falling to 7.27 million and quits dropping to 3.05 million. Meanwhile, ISM Manufacturing fell to 54.6 as its employment sub-index slowed to 51.2, while July construction spending contracted by 0.5%. Together, these cooling growth metrics capped the greenback’s initial rally and dragged Treasury yields lower.

Treasury yields have steadied after a volatile 48 hours, with the two-year near 4.36% and the 10-year around 4.77%. The Beige Book showed higher energy costs, limited hiring and cautious business sentiment. The Fed must now weigh persistent inflation pressure against signs of a softer labour market. Governor Christopher Waller’s remarks at 8:30 a.m. ET could determine whether markets return to Chair Kevin Warsh’s hawkish message or extend the Williams-led repricing.

Thursday’s US calendar will test whether the selloff can continue before payrolls. Jobless claims, trade, productivity and labour-cost figures arrive alongside Waller, followed by services PMIs later in the morning. A hawkish Waller, low claims and firm ISM data could lift DXY toward 99.50 to 99.60. Softer data and further yen strength would put 99.00 at risk, with the August low near 98.80 next in view.

After this morning, all eyes shift to Friday’s nonfarm payrolls report to break the macro deadlock. A soft employment print would validate Fed dovishness and push the dollar toward lower support levels. Conversely, a strong jobs number would reignite rate hike expectations and propel the greenback higher.

CAD: Loonie extends gains after hawkish BoC shift

The Canadian dollar extended Wednesday’s rally into Thursday, with USD/CAD trading near 1.379 after closing at 1.384. The pair is trading at its lowest level since late August, benefitting from a softer US dollar and investors continued absorbing the Bank of Canada’s stronger inflation warning. Canada’s two-year yield remained elevated near 3.09%, leaving its spread against the US equivalent around 128 basis points. That gap stood near 138 basis points before Wednesday’s decision. A 2% rise in WTI crude to $92.85 also supported the loonie through Canada’s energy exports.

The Bank kept its policy rate at 2.25%, but Governor Macklem signalled that inflation has become a greater concern. Energy costs, headline inflation near 3% and incoming counter-tariffs could keep price growth elevated. Markets responded by lifting the probability of an October hike from 19.5% before the meeting to 39.3% afterward. The tightening priced by December rose from 15 to 22 basis points, while expectations through March 2027 increased from 39 to 55 basis points. Our baseline remains for no change through December, followed by a rate increase in March 2027, although risks now point toward earlier action.

The shift comes as the Bank weighs inflation pressure against trade uncertainty and spare capacity in the Canadian economy. Macklem acknowledged that global bond yields are feeding into Canadian borrowing costs, but also noted limited signs of broader price pressure. That leaves the Bank with a difficult balance as Canada’s C$27.6 billion counter-tariff package takes effect on September 8. Higher oil prices and possible US retaliation could challenge the view that the inflation impact will remain modest. The October 28 Monetary Policy Report should provide a clearer assessment of how these forces affect the Bank’s outlook.

USD/CAD is now testing support between 1.3760 and 1.3800, with the August 21 low at 1.3760 marking the next key level. A move higher would bring 1.384 into view, followed by resistance between 1.39 and 1.399. Friday’s Canadian and US labour reports, both released at 8:30 am ET, will provide the next major test for the Loonie. Strong Canadian hiring alongside weaker US payrolls could reinforce the change in relative rate expectations and push USD/CAD below 1.3760. A Canadian disappointment paired with stronger US data could reverse part of the Loonie’s rally. Beyond Friday, counter-tariffs and incoming inflation data will show whether markets have correctly brought forward the next Bank of Canada hike.

GBP: Budget pressure builds

Andy Burnham faced his first Questions session as PM in the Commons yesterday. His responses did not appear to rattle the bond market, with 30-year gilt yields relatively subdued. That said, bonds may not have provided the clearest read given the broadly synchronised sell-off in global fixed income markets in recent days.

Thirty-year gilt yields are now at their highest levels in more than two decades, adding pressure to the UK’s already fragile fiscal backdrop. Bloomberg Economics estimates that higher borrowing costs could wipe around £12bn from the government’s £23.6bn buffer against its fiscal rules.

Burnham reiterated that “this will be a government grounded in fiscal responsibility”, but stopped short of offering specifics on borrowing, taxation or spending cuts. Markets are unlikely to wait long for more detail on how the Autumn Budget will fit within increasingly tight fiscal constraints.

More telling than the bond market was GBP/EUR’s move below the tight 1.1650-1.17 range that has held since late July. The cross has been the clearest expression of domestic political concerns in the UK. A break lower puts 1.16 in focus as the next key support level.

We expect news flow around the fiscal outlook to build in the coming weeks as investors sharpen their focus on the 28 October Budget. For sterling, the balance of risks remains skewed to the downside.

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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.