The dollar consolidates as traders digest a busy week
The dollar consolidated near a seven-week high as traders weighed strong US data, Fed rate expectations and renewed Middle East tensions following a reported tanker strike.
USD
Thursday brought the first genuine pushback against the post-FOMC dollar rally. Having peaked above 100.3 on Wednesday evening, a seven-week high, the DXY drifted back toward 100.0 as Treasuries rallied hard, the 10-year falling nine basis points to 4.93% after Wednesday's close above 5%. That the greenback conceded so little is notable given the scale of the bond move, and the data offered support: initial claims printed at 196k against 208k expected, and the Philadelphia Fed index jumped to 37.8 versus 30.5. That sits comfortably with our post-meeting view that the bar to an October follow-up is lower than we previously judged, leaving coin-flip pricing fair, though we still regard three more hikes over twelve months as too aggressive. Overnight, Iran's claimed strike on a tanker near Khasab lends a haven bid, with a BoJ decision to accompany a rate rise with dovish guidance adding further upside dollar pressure. Today brings industrial production at 14:15 BST, the leading index at 15:00, and Bowman and Schmid, the first Fed speakers since the blackout lifted.
EUR
The euro clawed back ground yesterday, adding a tenth to close just shy of 1.15. Softer crude did the work, with Brent sliding a further 2% as Riyadh signalled it could restore half the damaged East-West pipeline's capacity within days. As we have argued all week, the single currency remains hostage to the energy channel while Hormuz flows are impaired, and the ECB's 25bp hike to 2.50% on 10 September has bought it remarkably little cover. That relief now looks fragile, however, after Iranian claims to have struck a tanker overnight. We expect the euro to trade off crude and Fed pricing into the weekend, with risks still skewed modestly lower.
GBP
Sterling was the sole major to lose ground to the dollar yesterday, now sitting in the mid-1.33s this morning. The MPC delivered the 6-3 hold at 3.75% that we and consensus expected, with Greene, Mann and Pill again backing an immediate move to 4.00%, alongside a unanimous decision to run the APF to zero by September 2034. As we wrote yesterday, that unchanged vote masks a material shift: staff now see CPI near 3¾% in Q4 and above 4% in early 2027, while Bailey, Breeden, Lombardelli and Ramsden all signalled that a prolonged Middle East conflict would likely require tighter policy, the Governor adding that the decision gets harder the longer the Iran conflict runs. We retain our call for no change on November 5th against 85% market-implied odds of a hike, but upside risks are clearly building. More immediately, August retail sales have done little to move the needle this morning, keeping cable risks tilted toward 1.33 in the near term.
CAD
USDCAD stalled just shy of 1.40, finishing Thursday broadly unchanged. Two forces are offsetting. Crude has turned from tailwind to headwind, with WTI down as Saudi repairs progress and Washington prepares talks with Gulf states aimed at ending the war. Against that, August producer prices jumped 1.3% month-on-month from 0.6%, a reminder the energy shock is working through the Canadian pipeline even with headline CPI steady at 3.0% and core measures anchored near 2%. We continue to see no case for a move on October 28th and expect the Bank of Canada to hold at 2.25% into 2027, so the unwind of hike pricing should keep the loonie heavy. With the domestic calendar bare, direction comes from US data and Hormuz headlines; last night's reported tanker strike shows how quickly the risk premium can return. Consolidation around 1.40 remains our base case.