Little to knock the dollar off its perch
The dollar regained momentum as Treasury yields rose and FOMC minutes reinforced expectations of further tightening. Analysts see little near-term catalyst to weaken the USD against major peers.
USD
The dollar's Tuesday pause proved short-lived. Wednesday saw the DXY rise around 0.4 as Treasuries sold off again, with the 10-year touching 5.36% before a strong auction prompted yields to retreat. The September FOMC minutes added little: all 19 participants backed the hike to 3.75-4.00%, and most judged a further move would likely be appropriate by year-end, with the Middle East energy shock, AI investment and tariffs all cited as upside inflation risks. That fits our December call, with markets pricing a little over 20% for October 28th and a hike by December largely in the price. Today's docket is light, with jobless claims and speeches from Waller and Musalem the main items. We see little to knock the dollar off its perch in the near term.
EUR
The euro spent most of yesterday giving back Tuesday's relief rally. EURUSD slid almost 0.6% to the high 1.11s and, while it has steadied around 1.12 this morning, we continue to think the bounce is one to sell. The drivers are unchanged. Markets are still digesting a 2027 French budget that leaves the deficit close to 5% of GDP, and the finance ministry's statement that it will not alter its issuance plans did little for OATs, with the Bund spread still near euro crisis wides and Spain's November 29th snap election adding a second political overhang. Strong German industrial production, up 2.0% in August, was ignored. Today brings the accounts of the September ECB meeting at 12:30 BST, with Chief Economist Lane speaking in London at 11:00, alongside a raft of other ECB commentary. That said, with EGBs already under pressure this morning, we suspect sovereign stress will remain the main euro driver, with risks skewed to the downside near term.
GBP
Sterling fell back with the rest of the G10 against the dollar yesterday, cable dropping around 0.5% to trade just above 1.32 this morning, though it remains close to its strongest against the euro since June 2025. BoE support is intact: Catherine Mann's warning on Tuesday that headline inflation could hit 4% around year-end, alongside her backing for a November hike, keeps roughly 30-35bp of tightening priced by year-end. The problem remains the gilt market. 30-year yields have held above 6%, and a renewed oil surge on Middle East escalation only adds to the pressure ahead of the October Budget, where we expect disappointment for markets. For today, however, the BoE has a heavy schedule, with Greene at 10:15, Pill at 11:30, Governor Bailey at 13:15 and Lombardelli at 14:00, alongside the credit conditions survey. Given our view that the Budget risk premium is underpriced, we see the balance of sterling risks tilted to the downside, though likely not on today’s raft of commentary.
CAD
USDCAD rose around 0.4% to the mid-1.42s on Wednesday as the dollar found broad support from higher Treasury yields. Tuesday's four-year-high C$4.2bn trade surplus has largely been dismissed as front-loading ahead of US tariffs, while President Trump's comment that he is in no rush to resume talks with Canada capped loonie upside. Crude has rebounded overnight, with Brent back above $102 after the Pentagon reportedly ordered preparations for renewed strikes on Iran. But as last week showed, supply-driven oil gains tend to help the dollar as much as the loonie. There is no Canadian data today, leaving USDCAD to track oil, risk sentiment and US claims ahead of tomorrow's September jobs report. Consensus looks for a 5k rebound with unemployment rising to 6.5%; given our expectation for a soft print that rules out a Bank of Canada hike on October 28th, we see little scope for a sustained break below 1.42 this week.