- Oil’s ain’t well. Oil prices surged 10% this week, climbing back above $100, on the escalating Middle East conflict – reviving inflation concerns and complicating the outlook for central banks ahead of key policy decisions later this month.
- Yielding ground. Bond yields are climbing globally once again, the US 10-year is closer to 5%, a level that has historically tested equity market resilience.
- The cost of intelligence. The AI boom continues to support equity markets, but rising bond yields risk pushing up financing costs for the trillion-dollar infrastructure buildout.
- Inflation problem. Sticky US inflation has reinforced the recent rise in Treasury yields, strengthening the case for further policy tightening and keeping inflation risks firmly on investors’ radar.
- Hawkish ECB. The ECB raised rates by 25bp to 2.5%, the upper end of its estimated neutral range, while hawkish guidance helped the euro recover earlier losses.
- Higher for longer? Markets are increasingly leaning towards more rate hikes globally. A 25bp rate rise by the Fed next week is priced at 70%, with a further increase priced by January.
- Yen and again. Yen strength remained a dominant FX theme this week. With USD/JPY breaking key levels, investors are increasingly alert to the risk of renewed carry-trade deleveraging.
Global Macro
Energy inflation keeps global policy tight
ECB hikes. The ECB raised its deposit rate by 25bp to 2.50%, as expected, as the Middle East energy shock keeps inflation above target. Staff lifted the 2027 and 2028 inflation forecasts while improving the growth outlook.
US CPI. US inflation came in hotter than expected in August, strengthening the case for a Federal Reserve rate hike next week. Headline CPI rose 0.4% month on month, while core inflation increased 0.3%, its fastest pace since April. A Fed hold would now be the bigger market surprise.
US PPI rebounds. US producer prices rose 0.4% m/m and 5.4% y/y, above the 5.2% forecast in your calendar. Energy prices climbed 4.2%, while the ex-food, energy and trade-services measure rose a more moderate 0.3% m/m.
US labor holds. Initial claims came in at 206k, broadly matching expectations, while continuing claims slipped to 1.774mn. Layoffs remain low, leaving the Fed focused on inflation ahead of tomorrow’s CPI report.
China prices. China’s CPI accelerated to 0.8% y/y, matching expectations, while producer inflation rose 3.8% vs 3.6% expected. Higher commodity and energy costs drove much of the increase, while underlying consumer demand remained subdued.
Growth improves. Euro-area Q2 GDP was revised up to 0.6% q/q and 1.2% y/y, helped mainly by net exports. Japan’s final Q2 GDP was also revised higher to 0.4% q/q, although flat consumption left external demand as the main growth driver.
Week ahead
Hawk talk to face reckoning
Caught between inflation and politics. All eyes are on next week’s Fed decision. The recent surge in oil prices, a blockbuster jobs report, and a hot August inflation numbers have strengthened the case for a 25bp rate hike. While such a move would align with Governor Warsh’s recent messaging, it risks irritating President Trump, who has been explicit in his preference for lower rates. Either outcome leaves questions over the extent of yield support for the dollar.
Unlikely to move the needle. The UK jobs report and August inflation figures are due next week, ahead of the BoE policy decision on 17 September. We doubt that even an upside surprise in either release would be enough to shift market expectations away from a hold at next week’s meeting.
Hawks on alert. The BoE is expected to leave rates unchanged. The MPC is likely to emphasise a cautious approach while acknowledging upside risks to inflation. The recent rise in oil prices has pulled forward market expectations for the next hike to November from December, highlighting how alert BoE hawks remain, despite the central bank still being viewed as one of the least hawkish in the G7.
Guidance in focus. The BoJ is expected to hike rates next week. Its policy path has attracted growing attention in recent months, with central bank intervention to support the yen frequently making headlines. A hawkish policy trajectory remains essential for sustained yen strength, meaning the BoJ’s forward guidance will be scrutinised closely for clues on the pace of further policy normalisation.
FX views
Hike coming, dollar hesitating
USD Hawkish Fed, tired dollar. US August inflation may have helped seal the case for a Fed hike next week. The data were broadly in line with expectations, but the 0.4% rise in August headline CPI and the firmer-than-expected core print (0.3% vs. 0.2% consensus) were enough to grab attention. Markets quickly priced in a roughly 85% chance of a hike next week, keeping the dollar supported. That said, the support appears somewhat fragile. Part of the reason is that markets have been bracing for a hawkish Fed for some time. Positioning in SOFR futures still reflects a crowded short base, suggesting investors remain positioned to benefit from further rate increases. That is not necessarily good news for the dollar. The scope for further gains on a well-understood hawkish narrative appears increasingly limited. Also, following Warsh’s speech at Jackson Hole, markets may have set a high bar for further surprises. A “hike or nothing” mindset may also help explain the more muted reaction. For now, we remain mildly bullish on the greenback, as our base case remains a Fed hike next week.
EUR Euro holds firm, for now. The euro proved resilient this week despite a surge in oil prices to their highest levels since May. EUR/USD ended the week broadly flat, holding above 1.16. A hawkish ECB meeting likely helped offset softer sentiment, though there is limited additional support ECB rhetoric can provide. Markets are pricing two more hikes by April 2027, which looks somewhat excessive given the still-limited pass-through from higher energy prices into broader inflation. That said, the policy outlook will depend on where oil prices head from here. The euro traded relatively quietly against most major peers. The standout move was a roughly 2% drop in EUR/JPY, driven by growing conviction around a more hawkish BoJ path. We see modest downside risks for EUR/USD ahead of next week’s Fed meeting.
GBP Another mixed bag. Sterling experienced another week driven more by global developments than domestic ones. A hawkish ECB meeting weighed on GBP/EUR, while stronger-than-expected US inflation data pushed GBP/USD below 1.35. However, the pound attempted a recovery into the end of the week after UK GDP surprised to the upside, rising 0.4% m/m, reinforcing the view that the UK economy remains more resilient than many had expected. Even so, the dominant market themes remained external: higher global borrowing costs, hawkish rate repricing, and broader risk sentiment. Against that backdrop, sterling’s performance across the G10 was mixed, reflecting changing global macro dynamics more than UK-specific news. Looking ahead, attention turns firmly to next week’s UK data and the BoE meeting. Labour market and inflation releases will test whether recent economic resilience can be sustained. While no rate hike is priced at next week’s meeting, markets continue to expect around three hikes by Q1 2027. Any signs of further labour market cooling or easing inflation pressures could challenge those expectations, potentially undermining one of sterling’s key sources of support.
CHF Swiss swerve. The Swiss franc was back under pressure this week as markets continued to embrace its role as a preferred funding currency. With the SNB expected to keep rates anchored near zero for an extended period, CHF remains an attractive source of funding for carry trades, particularly as uncertainty surrounding the volatile yen has risen. However, while CHF remains one of the lowest-yielding currencies in the G10, options markets have started to price greater two-way risks. Volatility premiums in EUR/CHF have edged higher since the end of August, reflecting not only the broader repricing in FX volatility following the yen’s surge, but also growing questions over whether the SNB can remain quite as dovish as markets assume. Recent Swiss data have been surprisingly resilient. The pace of inflation has doubled from July to August, while second-quarter growth comfortably exceeded expectations. If resilient domestic data continue to challenge expectations for prolonged policy inertia, the franc could become a more volatile funding vehicle than investors have grown accustomed to.
CAD Loonie squeezed. USD/CAD is trading near 1.3870 after hotter US CPI strengthened the case for a Fed hike next week and widened the US-Canada two-year yield spread to about 127bp. Canadian rate expectations have also moved sharply higher following Governor Macklem’s inflation warning, with markets pricing more than 100bp of BoC tightening by July 2027. Yet the domestic economy may struggle to absorb that path after Canada lost 41,700 jobs in August, full-time employment fell 35,900, and wage growth slowed to 2.0%. Higher oil could keep inflation elevated and force the BoC to respond, but tighter policy would deepen the pressure on households and growth. Trade tensions add another headwind as Canadian counter-tariffs draw fresh US retaliation. USD/CAD remains biased toward 1.394, with a break exposing 1.40–1.41, while 1.376 remains the key downside support. Next week, markets will focus on Canadian CPI on Monday, with headline inflation expected to remain at 3.0%, before attention shifts to the Fed’s September 16 meeting and its implications for US-Canada rate spreads.
AUD Aussie wallets shut as confidence sinks. Australian consumer confidence fell sharply in September, with the Westpac sentiment index dropping 5.2% to 84.4. Rising fuel costs and renewed concerns about higher borrowing costs are weighing on household budgets, while cost-of-living pressures continue to erode financial security. The measure tracking family finances versus a year ago slumped 9.2%, highlighting weaker spending appetite and growing caution among consumers. Higher fuel costs and renewed rate-rise concerns are weighing on AUD/USD, which has fallen to a one-week low. We see first support at the 50-day EMA of 0.7104, followed by the 100-day EMA at 0.7064, while resistance stands at 0.7200. AUD/EUR, AUD/GBP and AUD/CNH have also slipped to one-week lows, reinforcing broad AUD weakness.
CNH China inflation picks up as energy costs rise. China’s consumer prices rose 0.8% year-on-year in August, matching forecasts and accelerating from 0.5%, marking the first increase in momentum since April. Higher energy prices were the main driver, while food prices also strengthened. Factory-gate prices increased 3.8%, exceeding both expectations and the prior reading as oil and metal prices advanced. USD/CNH remains near its strongest level against the yuan in almost three years. A move above the 21-day EMA at 6.7220 could open the way towards the 50-day EMA at 6.7428, while support sits at the psychological 6.7000 level. Meanwhile, AUD/CNH and SGD/CNH have fallen to one-week lows.
JPY Japan price pressures keep BoJ in focus. Japan’s producer prices increased 7.6% year-on-year in August, beating expectations of 7.4% and remaining close to July’s revised 7.7% pace. Monthly prices dipped 0.2% after a 0.4% rise previously. Import prices climbed 24.8% from a year earlier, staying elevated as a weaker yen and higher energy costs continue to lift input prices. Persistent cost pressures and expectations of a policy move are driving USD/JPY. The latest figures strengthen the case for a rate increase to 1.25% at the upcoming BoJ meeting. JPY was the best-performing G10 currency in the week starting September 7, with USD/JPY down 0.2%. USD/JPY remains about 6% below its 23 July peak of 163.99. We are watching the 21-day EMA at 157.11 and the 50-day EMA at 158.67 as the next key resistance levels.
MXN Carry faces pressure. The USD/MXN is trading near the 17 level, with the peso giving back earlier gains as higher oil prices and rising US yields strengthened expectations for a September Fed hike. Mexico’s carry remains supportive, with the two-year yield spread over the US still near 331bp, but that cushion narrowed this week as Treasury yields rose faster than Mexican rates. Domestic inflation offered a mixed signal: headline CPI increased to 3.26% y/y, below the 3.30% forecast, while core inflation accelerated to 3.88%, supporting Banxico’s decision to hold at 6.50%. The pair has twice tested the 16.88 yearly low without closing below it, while 17.00–17.01 remains the immediate resistance area. A sustained break higher would expose 17.10–17.20, while a move below 16.8 would resume the peso rally. Next week, the Fed’s September 16 decision will test the carry trade, with a hike likely to favour a sharper USD/MXN rebound and a hold giving the peso another chance to break its recent high.
BRL Carry meets politics. USD/BRL ends the week trading near 5.11, with the real caught between Brazil’s exceptional carry and rising fiscal and political risk. The two-year yield premium over the US remains wide at roughly 922bp, but it narrowed by about 33bp this week as Treasury yields surged while Brazilian yields edged lower. Higher oil offers support through export revenues, yet the government’s fuel-tax cuts and concerns over debt stabilization have weakened that benefit and added to the fiscal risk premium. Election polls have provided some support for Brazilian assets, although the race and the credibility of future fiscal reform remain major sources of volatility. Technically, 5.08–5.09 is the immediate support zone, while a break above 5.15 would expose 5.18–5.21. Next week’s Fed decision will test the carry trade, with Brazilian inflation, election polling and fiscal policy likely to determine whether the real can withstand another rise in US yields.
Have a question? [email protected]
*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.
