Dollar Stays in Control

USD

The US dollar enters Friday firmly supported after this week's strong US PMI data reinforced the narrative of economic resilience and persistent inflation pressures. Activity accelerated across both the manufacturing and services sectors, strengthening expectations that the Federal Reserve may not be finished tightening policy. This remains consistent with our view that September's 25bp rate increase may not prove to be a one-off move, with a further hike potentially on the table in October.

Geopolitical developments continue to add support. Ongoing hostilities in the Middle East are keeping markets focused on energy security, global trade routes and inflation risks, underpinning safe-haven demand for the dollar while elevated oil prices add to concerns that price pressures could remain sticky.

Attention today turns to August durable goods orders and the final September University of Michigan consumer sentiment survey. Strong readings would reinforce expectations of further Fed tightening and should help keep the dollar supported as quarter-end approaches.

EUR

The euro remains on the defensive against the dollar despite signs that eurozone activity has held up better than expected. Flash PMI data earlier this week showed an improvement in business activity across the bloc, but stronger US data remained the dominant driver, leaving EUR/USD under pressure.

Rising energy and transportation costs continue to feature prominently in business surveys, highlighting the impact of the ongoing Middle East conflict on the region's inflation outlook. These pressures complicate the outlook for policymakers by creating inflation risks even as growth concerns remain present.

Having raised the deposit rate to 2.50% earlier this month, the ECB is expected to adopt a more cautious approach in the near term. While another increase before year-end remains possible, policymakers are likely to proceed carefully as they assess the effects of tighter financial conditions and higher energy costs. German consumer confidence and eurozone monetary data are due today, but the euro is likely to remain primarily driven by developments in the dollar, energy markets and geopolitics.

GBP

Sterling has struggled to gain traction against the stronger dollar this week. Softer UK PMI data showed private-sector growth slowing to a three-month low, while businesses reported rising energy, fuel and raw-material costs. The combination reinforces concerns that the UK economy continues to face a difficult mix of subdued growth and persistent inflation pressures.

The Bank of England left Bank Rate unchanged at 3.75% on 17 September while maintaining a relatively hawkish tone. Our base case remains that rates will stay unchanged through year-end, although a prolonged escalation in the Middle East and a further rise in energy prices would place that view under increasing pressure.

There was some positive news overnight, with September's GfK consumer confidence index unexpectedly improving from -14 to -13, its strongest reading since August 2024. While the result suggests households are becoming more optimistic, confidence remains firmly in negative territory and rising energy and fuel prices remain a key risk. With little else on the UK calendar today, sterling is likely to take its direction from the dollar, gilt markets and broader risk sentiment.

CAD

The Canadian dollar continues to face competing influences from stronger oil prices and broad US dollar strength. Recent trading has demonstrated that, while higher crude prices are generally supportive for the loonie, expectations of further Fed tightening and safe-haven demand for the US dollar remain the dominant market drivers.

Yesterday's Canadian retail sales data showed spending falling 0.7% in July, with core retail sales also declining 0.7%. However, Statistics Canada's advance estimate pointed to a rebound in August, suggesting some improvement may already be underway.

The Middle East remains central to the outlook. Higher oil prices are supportive for Canada as a major energy exporter, but any escalation in geopolitical tensions is equally capable of driving demand for the US dollar. As a result, the Canadian dollar is likely to remain caught between support from commodity markets and the broader strength of the greenback. Today's US data releases and developments in energy markets are likely to set the tone heading into the weekend.

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.