- Yield to reality. Global bond yields have reached 4% for the first time since 2007, driven by surging US Treasury yields amid persistent inflation, resilient growth, a hawkish Fed, and heavy government and corporate borrowing.
- Risk-off ripple. The global bond sell-off is spilling into FX, boosting the dollar as higher yields and weaker risk sentiment encourage investors to favour liquidity and defensive positioning.
- Geopolitical skepticism Markets remain unconvinced by reports of a potential US-Iran deal, with oil quickly reversing losses as investors continue pricing persistent geopolitical and supply-related risks.
- Inflation impulse. Rising freight costs, commodity prices, supply-chain pressures and a stronger dollar are reinforcing the global inflation impulse, complicating the path towards lower interest rates.
- Paws for thought. President Xi’s first US state visit since 2015, alongside the gift of two pandas, symbolised warmer ties and reinforced a managed-competition framework prioritising stability, dialogue and communication over confrontation.
- Spread the word. Eurozone economic resilience is being offset by widening sovereign spreads, with French yields remaining elevated versus Bunds and political uncertainty continuing to temper euro optimism.
- Buckle up. Markets face a deluge of data including inflation from both sides of the Atlantic and, of course, the US jobs report on Friday.
Global Macro
Global growth firms as policy paths diverge
Central banks split. Norges Bank raised rates 25bp to 4.50% and left open the possibility of further tightening. The Swiss National Bank held at 0%, the Riksbank stayed at 1.75%, and Banxico held at 6.50% as expected, extending its pause.
US growth surges. The US composite PMI jumped to 58.4 from 56.0, its highest in more than five years. Services rose to 58.7 and manufacturing to 57.0, with stronger hiring and demand accompanied by another increase in input costs.
Europe rebounds. Euro-area composite PMI rose to 53.1 vs 51.7 expected, the strongest reading in more than three years, with services at 53.0 and manufacturing at 52.7. The UK moved in the opposite direction, with its composite PMI slowing to 51.7 from 52.5 as cost pressures intensified.
US labor holds. Initial claims fell to 197k vs roughly 203k expected, while continuing claims were little changed near 1.72mn. Low layoffs and the stronger PMI employment reading suggest the labor market remains firm enough to support further Fed tightening.
Canada and Mexico diverge. Canadian retail sales fell 0.7% m/m in July, with volumes down 1.1%, although the advance estimate points to a 1.3% rebound in August. Mexico’s July activity rebounded 0.8% m/m, while early-September headline inflation accelerated to 3.42%, above expectations, even as core eased to 3.79%.
Week ahead
Markets seek clarity on all fronts
Markets need more than hope. Before the data, markets will be watching closely to see whether this week’s reports that the US and Iran are working towards a phased path to ending the conflict gain traction in the coming days. Investors remain sceptical, but hope springs eternal.
Jobs data in the spotlight. The key focus next week will be the US jobs report. Recent weeks have seen Fed tightening expectations become more entrenched, following a 25bp rate hike in September. The US labour market remains broadly resilient, and another strong report would help reinforce the case for further tightening. Ultimately, however, inflation remains the key determinant of the Fed’s next move.
Another bump for eurozone inflation. In the eurozone, preliminary September inflation data are due, alongside releases from key member states. Consensus estimates point to headline inflation rising to 3.5%, moving further away from the ECB’s 2% target. The ECB has already raised rates twice, and a hotter-than-expected print would bring the prospect of another hike in October into sharper focus.
FX views
Market scepticism mutes de-escalation optimism
USD Dollar finds fuel in stalled diplomacy. The US dollar was supported this week by firmer Fed tightening expectations and a lack of meaningful progress on geopolitical de-escalation. DXY climbed to near two-month highs, testing the 101.50 area. The move extended gains from the previous week’s unanimous 25bp Fed hike. Markets were left unconvinced by the limited positive headlines emerging from a series of high-stakes diplomatic meetings, reinforcing scepticism over a near-term end to the Middle East conflict and keeping October Fed hike expectations elevated. That said, the dollar rally is beginning to look stretched. Further gains will likely require stronger conviction around a Fed hike in October, currently priced at around 70%. For now, meaningful de-escalation progress remains the clearest path to a pause next month, which would likely weigh on the greenback. Key macro releases, including next week’s jobs report, will also be closely watched.
EUR A good week for Europe, a better one for the dollar. The euro had a broadly constructive week. The ECB’s hawkish stance remains well established, although the case for another rate hike is gradually narrowing. The Bank has already raised rates twice, and taking the deposit rate to 2.75% may increasingly come at the expense of growth. On that front, this week’s S&P PMI and Ifo surveys reinforced the picture of solid eurozone economic momentum despite the conflict and ongoing political uncertainty. The data did little to support the euro against the dollar, however. EUR/USD is down around 1% this week, trading near two-month lows. The decline adds to a difficult month for the pair (-2% MTD), with higher energy prices, rising long-end yields and firmer Fed hiking expectations providing clear support for the dollar. Whether the move has further room to run will depend on geopolitics and incoming US data. For now, we would expect consolidation around 1.14 before either regains control of the narrative and reignites directional momentum.
GBP Under the pump. Sterling endured a difficult week, underperforming most of the G10 as global yields surged, risk sentiment deteriorated and energy prices remained elevated. The biggest casualty was GBP/USD, which fell through a cluster of key moving-average supports in the low‑1.34s and extended its decline towards the 100‑week moving average near 1.3240, a level we highlighted as an important downside target. The domestic backdrop offered little relief. The major downside surprise came from the September PMIs, with the composite index falling to 51.7, one of the first meaningful misses after a prolonged run of stronger-than-expected UK data. That reinforces our view that the UK’s data pulse is likely to soften into year-end. Yet markets continue to price an aggressive BoE tightening profile well into 2027. The risk of a dovish repricing is one of the pound’s major vulnerabilities in our view. Technically, a close below 1.3240 this week would expose a retest of this year’s low near 1.3140, with the psychologically important 1.30 handle emerging as the next major downside target. Meanwhile, GBP/EUR has also slipped towards the lower 1.16s as EZ PMIs supported the common currency.
CHF Set for further weakness. The Swiss franc remained under pressure this week as the SNB doubled down on its ultra-dovish stance despite acknowledging that domestic growth was “exceptionally strong” in the second quarter. Policymakers left rates unchanged and offered no indication they are prepared to deviate from expectations that policy will remain on hold through the end of 2027. With most major central banks still leaning towards further tightening, widening rate differentials continue to work against CHF. The move reinforces the franc’s growing status as a preferred funding currency. Near-zero Swiss rates, subdued FX volatility and an SNB seemingly comfortable with a weaker exchange rate provide an attractive backdrop for carry trades. Price action reflects this dynamic. USD/CHF has risen for five consecutive weeks, breaking above its 100-week moving average and reaching its highest level in more than a year, a bullish technical signal for the pair. EUR/CHF also remains well supported as markets increasingly view the SNB’s policy stance as an open invitation to fund higher-yielding opportunities elsewhere.
CAD Dollar breakout. USD/CAD is trading near 1.414, up about 1.1% this week as widening rate differentials and trade uncertainty extend the loonie’s decline to nine consecutive sessions. Strong US activity and the Fed’s hawkish policy shift have pushed the US-Canada two-year yield gap to a cycle high near 150bp, overwhelming higher oil prices and growing expectations for Bank of Canada tightening. Markets now price roughly even odds of an October BoC hike and a stronger chance of action by December, but Canada’s weak growth outlook limits how quickly policymakers can follow the Fed. The move above 1.40 marks a clear technical break, with the former resistance level now acting as support and 1.42–1.43 range coming into view. After nine consecutive sessions trading higher, the chances of consolidation close to the 1.41 level increase. Trade risk remains elevated ahead of the September 29 US import restrictions, while the October 28 BoC decision will test whether Canadian policy can begin closing the widening rate gap. Next week, Canada’s July monthly GDP on Tuesday will test the domestic growth outlook, before Friday’s US payrolls report provides the next major signal for Fed pricing, yield spreads and USD/CAD direction.
AUD Down down under. The Australian dollar came under sustained pressure this week, emerging as one of the weakest-performing major currencies. AUD/USD fell 1.1% on Wednesday and later dropped a further 0.4% on Thursday as stronger US economic data, rising US Treasury yields and broad US dollar strength weighed on risk-sensitive currencies. Domestic developments offered little support. While Australia’s August employment rose by a stronger-than-expected 39,000, the increase in the unemployment rate tempered optimism. RBA Governor Michelle Bullock reinforced a hawkish message, warning inflation remains too high and may become embedded if global supply shocks persist. Looking ahead, AUD/USD remains vulnerable while US yields stay elevated. The RBA looks likely to hike on Tuesday to a more than decade high of 4.60%. Key support is located at 0.7000, with a break potentially opening a move towards 0.6870.
CNH Dollar-driven rebound. The offshore yuan dropped as broad US dollar strength outweighed positive developments on the geopolitical front. Markets welcomed signs of improving US-China engagement, with early trade discussions reportedly held in a positive atmosphere ahead of a planned meeting between Presidents Donald Trump and Xi Jinping. Nevertheless, stronger US economic data and a sharp rise in Treasury yields supported the greenback and pushed USD/CNH higher. The pair gained around 0.5% over the week, extending its rebound from multi-year lows near 6.7000. China’s inflation backdrop improved modestly, but investors remained focused on the widening gap between US and Chinese interest rate dynamics. Looking ahead, USD/CNH direction is likely to remain driven by the US dollar and progress in US-China relations.
JPY Creeping death. The Japanese yen was down sharply over the week as widening yield differentials continued to favour the US dollar. USD/JPY climbed to a three-week high and was among the best-performing US dollar pairs as investors reassessed the outlook for Bank of Japan policy. Markets interpreted the BoJ’s recent rate increase as relatively dovish, with policymakers showing little urgency around further tightening. The move coincided with a sharp rise in global bond yields, led by the US 10-year Treasury yield which climbed above 5% for the first time since 2007. Looking ahead, the yen remains sensitive to developments in global bond markets. Unless the BoJ signals a more aggressive tightening path, elevated US yields are likely to keep upward pressure on USD/JPY.
MXN Carry cracks. USD/MXN is trading near 17.67, up roughly 2.6% this week as stronger US activity, rising Treasury yields and higher oil prices triggered a broader unwind in EM carry trades. The Mexico-US two-year yield spread has narrowed to about 303bp from 331bp at the start of September, reducing the cushion that had supported the peso through much of the year. Banxico’s hold at 6.50% preserves a sizeable rate advantage, but the dollar’s renewed momentum has overwhelmed constructive US-Mexico trade signals for now. The break above the post-Fed high near 17.27 has strengthened the bullish USD/MXN structure, with 17.70 the immediate resistance and 17.80 next in view; initial support sits around 17.50, followed by 17.27. Next week, Mexico’s unemployment and manufacturing data will provide the main domestic tests, while Friday’s US payrolls report will shape Fed expectations and determine whether the carry unwind extends or the peso begins to recover.
BRL Election risk builds. USD/BRL is trading near 5.19, up about 1.0% this week as the global carry unwind and stronger US yields pressure the real. Brazil’s two-year yield premium over the US has narrowed to roughly 900bp, but remains wide enough to contain the selloff, while cautious Copom minutes suggest the easing cycle will remain gradual despite expectations for one more cut this year. Election risk is now the dominant domestic driver, with the first round approaching and fiscal concerns keeping implied volatility above 23%. Technically, 5.20–5.21 is the key resistance zone; a sustained break would confirm a broader deterioration and open further upside, while 5.14 and 5.08–5.09 provide support. Next week, attention turns to Brazil’s industrial production and PMI data, fresh election polling and Friday’s US payrolls report, which will shape Fed expectations and the broader EM carry trade.
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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.
