The dollar gains on Tuesday ahead of August PCE

USD

The dollar extended its advance on Tuesday, with the DXY closing roughly 0.2% higher around 101.4, a near two-month high, even as oil retreated. Ten-year Treasury yields held above 5.2%, close to their highest since 2007, after Governor Barr said further policy adjustments are likely needed, while Williams saw no urgency but still pencilled in one more hike this year. That guidance has, admittedly, weighed on expectations, which now see October rate hike odds as a near coin toss, helped by yesterday’s softer data. JOLTS openings fell to 7.1m, and consumer confidence slumped to 81.9, its lowest since 2014, with respondents citing oil and gas prices. Today brings August PCE at 13:30 BST, where traders look for core at 0.3% MoM and 3.3% YoY, alongside final Q2 GDP, annual revisions and ADP. An in-line print should keep October on the table, but with quarter-end flows in play, we would not chase dollar strength today.

EUR

The euro remained the standout underperformer yesterday, with EURUSD sliding to the low 1.13s, its weakest since May 2025 and now down close to 2.5% on the month. As previously flagged, the single currency has little domestic support: Lagarde's message that a measured response remains appropriate offered euro bulls nothing new, while a rising French risk premium and renewed Middle East tensions weighed on sentiment. That said, Tuesday's Spanish flash CPI jump to 4.9% prompted some ECB repricing, and today's national prints will determine whether pressure can build. French CPI is offering early support, overshooting expectations by 0.2pp to land at 3.0% YoY; Italian inflation is seen at 3.8% at 10:00 BST, and German state data from 09:00 BST should set up a national reading at 13:00 BST that pushes headline inflation back above 3%. Granted, energy-driven headline strength alone is unlikely to shift the Governing Council, but signs of broadening price pressures would put an October hike squarely on the cards and offer the euro modest support ahead of Friday's flash HICP. For the time being, however, with US PCE due later and the dollar backdrop firm, any euro bounce will be hard to sustain unless the Hormuz talks deliver a breakthrough.

GBP

Sterling again traded with greater resilience than the euro yesterday. Cable held around 1.32, roughly flat on the day, while EURGBP drifted lower as markets digested Andy Burnham’s Labour Party conference performance. The PM confirmed plans to replace the pension triple lock with a cheaper double lock from April 2030 to fund a National Care Service, alongside a pledge to stick to the fiscal rules. Gilts took the news in their stride, but investors will want to see the arithmetic in the 28 October budget, an area where we remain deeply sceptical. Today's calendar is light: final Q2 GDP landed above expectations at 0.5% QoQ, but offering only modest sterling support given well-known data quality concerns. That should leave sterling to trade off US PCE, German inflation and Middle East headlines through the remainder of the session, with downside risks building in the weeks ahead as budget day draws closer.

CAD

The loonie struggled again on Tuesday, with USDCAD delivering repeated tests of 1.42. On the domestic side, July GDP printed flat, matching consensus and our expectations, with gains in construction and utilities offset by declines in manufacturing, oil and gas extraction and retail. Statistics Canada's advance estimate pointed to 0.2% growth in August, some reassurance that the economy is not rolling over after Q2's 3.3% annualised expansion, but confirmation that momentum is fading. A retreat in crude on hopes of progress in mediated US-Iran talks removed another source of currency support. There is no top-tier Canadian data today, so the pair will take its cue from US PCE at 13:30 BST, oil, and quarter-end rebalancing. A firm inflation print would likely see USDCAD test 1.42, while a softer reading and any de-escalation in the Gulf offer the best chance of a modest loonie recovery.

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