A supportive backdrop for the buck into quarter end

USD

The dollar spent Monday clawing back the ground it briefly ceded late last week, with the DXY back above 101 and trading around two-month highs this morning, prompted by a weekend collapse of US-Iran diplomacy. President Trump rejected Tehran's seven-day plan to reopen the Strait of Hormuz in exchange for lifting the US naval blockade, leaving Brent above $105 per barrel. Treasuries, in turn, remain under pressure. Monday saw the 10Y yield reach 5.25%, a fresh 19-year high, weighing on equities - a combination that favoured the greenback through both the yield and haven channels. Overnight, reports that mediated talks were proceeding constructively were quickly denied by Trump, so headline risk remains dollar positive through early trading. Middle East developments aside, an RBA rate hike is the main event of note this morning, though as we warned in our preview, dovish guidance was always likely to be the key market takeaway, an outcome that has pushed AUDUSD below 0.70. Today also brings JOLTS and Conference Board consumer confidence at 15:00 BST, alongside a heavy run of Fedspeak including Williams and Waller. With PCE tomorrow and payrolls on Friday still to come, we expect the dollar to stay supported, though quarter-end rebalancing flows could disrupt that temporarily in the coming days, leaving us a little more cautious on direction until October gets underway.

EUR

EURUSD slipped to start the new week, now trading in the mid-1.13s with the pair down more than 2% on the month. The move was largely a dollar story, but the euro had little domestic support to lean on. In her hearing before the European Parliament, President Lagarde acknowledged that the 2027-28 inflation outlook has been pushed higher by energy prices, yet insisted a measured response remains appropriate because the shock is not yet becoming embedded. Markets read this as little urgency to follow September's hike to 2.50%, even as hostilities in the Gulf keep energy costs elevated. We think Lagarde’s narrative could see some challenge this morning, however, with Spanish flash CPI rising more than expected to land at 4.9% YoY, up from 4.3% in August. Accompanied by a 0.2pp rise in core price growth to 3.1%, this sets the tone for the national CPI prints later this week and Friday's flash HICP. If this morning’s overshoot is repeated across other countries in the coming days, an October rate rise is likely to be squarely on the cards for the ECB, offering modest upside euro support, regardless of Lagarde’s guidance yesterday.

GBP

Sterling was a notable outperformer on Monday. Cable recovered from near three-month lows to trade in the mid-1.32s, while EURGBP fell, after Deputy Governor Ramsden said inflation risks had tilted to the upside and that there could be a case for raising Bank Rate if pressures continue to build. Coming on the heels of Governor Bailey's comments last week, this leaves a November hike close to 90% priced in – now our base case too after a hawkish recent shift in MPC guidance. That said, we are cautious about how much sterling can benefit from hikes forced by an energy shock that is simultaneously squeezing growth. Fiscal risk also lingers: at the Labour conference, Chancellor Healey preached discipline ahead of the October 28th budget, though on our best estimate, almost all headroom has been eroded by a weaker backdrop and additional spending commitments. Still, with expectations high that PM Burnham will announce a scrapping of the triple lock on pensions in his speech later today (albeit only in the next parliament), sterling risks are two-sided in the short run until the fiscal reality becomes more fully apparent later this month.

CAD

The loonie again failed to draw support from higher oil prices on Monday. USDCAD rose further above 1.41 and remains near ten-week highs for the pair, having risen from around 1.38 earlier in September. The problem for CAD is that oil's rally reflects supply disruption from the Middle East hostilities, which lifts inflation and US yields more than it improves Canada's terms of trade. Meanwhile, the Fed's September hike to 3.75-4.00% against a Bank of Canada on hold at 2.25% has pushed the two-year Canada-US spread to around 150bp, its widest since early 2025. Today's July GDP release at 13:30 BST is the key domestic test. Consensus looks for a flat reading after 0.3% growth in June. A soft print would reinforce our view that the second quarter's 3.3% annualised expansion overstated underlying momentum, particularly with US tariffs still weighing on trade, and would keep the Bank of Canada comfortable on the sidelines ahead of its October meeting. We think a disappointment opens the door to a test of 1.42.

Disclaimer

This information has been prepared by Monex International Markets plc, part of Monex S.A.P.I. de C.V. (“Monex”). The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. All entities in the “Monex” group of companies are regulated for different products and services within the jurisdictions in which they operate. Details of the different entities can be found here. Details of the respective entities’ regulated status and available products and services can then be found on the relevant links to the individual jurisdictions’ website.