More dollar gains with the euro under pressure

USD

Monday's ISM services report was softer at the headline but awkward in the detail. The headline index slipped to 54.9 from 55.4, with new orders also slipping, yet prices paid rose to 74.0, the highest since July 2022, while employment climbed back above 50. That mix did nothing to revive October hike odds, still around 20% after Friday's 29k payrolls print, but it pushed 10-year yields up 3bps to 5.31%. The DXY, in turn, printed fresh highs before easing to around 102.2 overnight, albeit with euro weakness doing most of the heavy lifting through the early part of the session. Today's calendar is thin, with the August trade balance at 13:30 BST expected to show a wider deficit, and appearances from Williams and Bowman unlikely to add much ahead of Wednesday's FOMC minutes. Consistent with our October forecasts, we expect the dollar bid to persist.

EUR

The euro was again the G10 laggard on Monday, seeing EURUSD initially slide to a 17-month low, before stabilising around 1.12. Politics proved the primary driver yet again: Spain's Sánchez called a snap election for 29th November after his housing decrees were defeated, while French OATs continue to trade under pressure. ECB speakers broadly matched our expectations of a lean against aggressive hike pricing. Nagel said upside risks dominate and called for flexibility rather than inaction, but saw no clear signs of second-round effects, while Lane warned that elevated long-term rates are weighing on growth. Markets now price minimal risk of October tightening, and under one full hike by December. This morning German factory orders fell 10.6% MoM in August, with eurozone retail sales due at 10:00 BST. Perhaps more relevant, though, given market focus on political and fiscal risk - the 2027 budget bills are formally tabled today in France, starting the 70-day clock under a censure threat, while a Le Pen press conference is expected too. With Hormuz closed and Brent only just below $100, we continue to see rallies sold and 1.11 as the next marker.

GBP

Sterling again held up relatively well yesterday, though cable eased 0.2% - EURGBP, in contrast, drifted lower as the euro bore the brunt of European fiscal stress. With a majority of the MPC now flagging second-round concerns from higher energy costs, markets price in roughly 35bps of tightening by year-end, a cushion that continues to spare the pound the euro's treatment for now, despite similar fiscal strains. Today brings a fireside chat from Catherine Mann, who we expect to stress the inflation risks from the Middle East-driven energy shock, which should be marginally sterling supportive. Still, with long gilts having breached 6% last week and Chancellor Healey's 28th October Budget approaching, a renewed sell-off, whether on Gulf energy headlines or fiscal arithmetic, remains the pound's soft underbelly.

CAD

The loonie extended its underperformance on Monday, with USDCAD rising fractionally, though our 1.41–1.43 range remains intact for now. Oil was once more the culprit. Crude prices slipped, with Brent dipping below $100 this morning, with WTI now under $90. Data showing Gulf crude shipments back near 98% of pre-war levels as Hormuz traffic recovers, Aramco cutting its November Asian prices to the widest discount since 2020, the G7's 100 million barrel reserve release, and an unchanged OPEC+, have outweighed Houthi claims of strikes on Aramco facilities and quickly denied reports of damage to the East-West pipeline. Today, August trade data at 13:30 BST should show the surplus widening on an energy export rebound, with the Ivey PMI at 15:00 BST. The bigger test is Friday's jobs report, where consensus looks for a 5k payroll gain after -42k in August, and unemployment at 6.5%. We expect a soft reading that rules out a BoC move on 28th October, pushing USDCAD toward the 1.43 ceiling of our expected range for the pair.

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.