Rising yields catch the eye ahead of US CPI
The dollar strengthened as rising US Treasury yields and higher oil prices increased expectations of a September Fed rate hike, with August CPI now seen as decisive for near-term FX direction.
USD
The dollar firmed for a second session on Thursday, with the DXY closing near 99.1 after an outbreak of bond market volatility saw yields rise sharply across the board. On the US side of the equation, yesterday’s August PPI matched expectations at 0.4% MoM, but the component-level breakdown tilted hawkish in its PCE readthrough. Meanwhile, WTI jumped almost 6% to above $103 and Brent through $107 as US-Iran hostilities continue to intensify, pushing 10-year Treasury yields towards 5.0%, their highest since 2023. Putting this together, markets now price roughly 70% odds of a 25bp Fed hike to 3.75–4.00% on September 16th, up from 60% yesterday morning, with today's August CPI at 13:30 BST now decisive. Consensus sits at 0.4% MoM and 3.4% YoY, with core expected to be more contained at 0.2% MoM. An upside surprise should extend the dollar rally and all but confirm next Wednesday's hike; a soft core print revives the case for a pause, likely pushing the DXY back below 99 before the week is out. We lean toward the latter outcome, just about, albeit that call now looks finely balanced after seeing yesterday’s numbers.
EUR
As we flagged yesterday, the ECB delivered a 25bp hike, taking the deposit rate to 2.50%, its second increase since the Iran conflict began driving energy prices higher. President Lagarde struck a constructive tone, noting the Governing Council has been "surprised by economic resilience", that 2026 growth could exceed projections, and that inflation looks longer-lasting, while declining to pre-commit on the next move. Markets took the guidance hawkishly, pricing further hikes into year-end, and the euro proved relatively resilient against a firmer dollar, trading around 1.16 this morning. Even so, the Governing Council must still weigh energy-driven inflation upside against any increased drag on growth, leaving us sceptical about the degree of hawkishness now priced into swaps, with more than three additional rate hikes now priced in for the coming 12 months. With no top-tier eurozone data due, EURUSD direction today rests on US CPI, and on any ECB commentary that adds clarity to yesterday’s guidance.
GBP
Sterling was once again a passenger to external drivers on Thursday, trading flat against both the dollar and the euro as oil, US yields and the ECB dominated. This morning has brought a rare piece of good news: July GDP rose 0.4% MoM against expectations of a flat reading, following June's 0.3% expansion, with manufacturing output up 0.9%. GBPUSD has ticked up on the release, though the move was modest, understandably given the unresolved fiscal questions ahead of the autumn Budget. The growth beat modestly challenges the stagflation story and gives the Bank of England something to weigh at next Thursday's meeting, but with US CPI due this afternoon, sterling is unlikely to escape the dollar's gravitational pull. We continue to see risks skewed to the downside absent positive fiscal news.
CAD
The loonie softened again on Thursday, USDCAD rising 0.2% as deteriorating risk sentiment and the escalating US–Canada trade war offset what should be a supportive oil backdrop. Washington's move to bar some Canadian-origin goods entirely, just days after Ottawa's counter-tariffs of 15–50% on some $20bn of US goods took effect, points to continued escalation as the likely near-term path. And combined with yesterday’s jump in yields, Canadian growth looks set to be a casualty after finally showing signs of recovery in Q2, a dynamic that we think warrants a modestly softer loonie, barring any resolution. Today's domestic calendar is light, leaving the loonie to trade off US CPI, crude prices amid the Hormuz disruption, and any fresh trade headlines.