Forex News
Brown Brothers Harriman’s (BBH) Elias Haddad notes that recent Oil-driven market moves and sticky US Consumer Price Index (CPI) have strengthened expectations for a September Fed hike, but the futures curve already prices nearly 100 bps of tightening over twelve months. With the Fed and Bank of Japan (BoJ) decisions in focus, the bank sees asymmetric risks for the Dollar and skewed upside for the Japanese Yen.
Fed and BoJ shape pair outlook
"The overshoot in Brent crude oil prices above $100 a barrel drove most of last week’s market moves, pushing bond yields higher, weighing on equities, and lending USD modest support. In parallel, sticky US August CPI inflation strengthened the case for a September Fed funds rate hike but failed to justify an aggressive tightening path. USD quickly surrendered its initial gains and finished broadly flat on Friday."
"The Fed and BoJ decision take center stage this week, with risks tilted toward a lower USD/JPY."
"The futures curve already imply almost 100bps of tightening over the next twelve months: 25bps this week, another 25bps hike by year-end, and nearly 50bps by September 2027. This creates an asymmetric risk for USD with limited gains from a hawkish outcome, but greater downside from a dovish surprise."
"Bottom line, risks are skewed towards further JPY gains. A hawkish 25bps hike would extend the rally in JPY, while a surprise 50bps move would supercharge it. The bearish JPY scenario is a narrow majority for a 25bps hike and/or Ueda pushing back against market rate expectations."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- Gold starts the week under pressure as traders gear up for the Fed’s monetary policy meeting.
- Rising Oil prices, a stronger US Dollar and elevated Treasury yields weigh on the metal.
- Technically, XAU/USD trades between the 50-day and 100-day SMAs, keeping the near-term bias range-bound.
Gold (XAU/USD) kicks off the week on a bearish note as Federal Reserve (Fed) interest rate hike expectations dominate market sentiment ahead of the two-day monetary policy meeting starting on Tuesday.
At the time of writing, XAU/USD trades around $4,270, down roughly 1.80% on the day, its lowest level since August 7.
Friday’s US Consumer Price Index (CPI) report all but cemented the case for a quarter-point rate increase this week. Data released by the US Bureau of Labor Statistics showed that headline CPI rose 0.4% MoM in August, accelerating from 0.1% in July, while core CPI increased 0.3% during the same period, up from 0.2% and marking its fastest pace in four months.
According to the CME FedWatch Tool, markets now price in an 86% probability of a rate hike, up from around 59.4% a week ago.
Rising Oil prices are reinforcing expectations of a hawkish Fed outcome as conflict in the Middle East continues to escalate. West Texas Intermediate (WTI) Oil trades around $99.00, near levels last seen on May 21, and has gained over 15% so far this month.
Moving to the war in the Middle East, the Iran-aligned Houthis said they have captured more strategic islands near the Bab el-Mandeb shipping route, while Saudi Arabia has shut down its East-West pipeline, which bypasses the Strait of Hormuz, following a drone attack. Meanwhile, a meeting between Iran and Gulf Arab states due on Monday and aimed at discussing a temporary shipping framework for the Strait of Hormuz has also been postponed.
Expectations of higher borrowing costs in the US, alongside elevated geopolitical tensions, are also supporting demand for the US Dollar (USD), while US Treasury yields remain elevated across the curve.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.57, up roughly 0.50% on the day and at its highest level since September 3. Meanwhile, the benchmark 10-year US Treasury yield hovers near the 5.00% mark, a level last touched in October 2023.
Since the war in the Middle East broke out, the metal appears to have partly decoupled from its traditional safe-haven role, with price action increasingly driven by interest rate expectations rather than geopolitical tensions.
As a result, a Fed rate hike accompanied by hawkish guidance could leave Gold vulnerable to further weakness. Conversely, a surprise hold would likely weigh on the US Dollar and Treasury yields, giving the precious metal room to rebound.
Technical analysis: XAU/USD struggles below 100-day SMA
On the daily chart, XAU/USD is trading between the 50-day Simple Moving Average (SMA) at $4,271 and the 100-day SMA at $4,33, pointing to a near-term range-bound phase with a mild bearish bias.
Momentum indicators also point to consolidation rather than a strong directional move. The Relative Strength Index (RSI) sits in the mid-40s, while the Average Directional Index (ADX) has eased toward the low-20s, suggesting weak trend strength. The Moving Average Convergence Divergence (MACD) remains below zero, indicating that sellers still hold a modest advantage.
On the downside, the 50-day SMA near $4,272 acts as immediate support. A daily close below this level would increase bearish pressure and expose $4,150, followed by the $4,000 psychological mark.
On the topside, initial resistance comes at the 100-day SMA at $4,331, followed by the 200-day SMA near $4,538, while a more distant horizontal barrier sits at $4,700. A daily close back above the 100-day SMA would be the first sign that buyers are regaining control.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
- US 10-year yield tops 5% for first time since 2023
- Fed hike odds reach 93%, lifting Dollar toward weekly highs
- Dot-plot and energy shock now shape post-FOMC yield path
The US 10-year Treasury yield has breached the 5% threshold for the first time since 2023, rising by over 4 basis points as investors had almost fully priced in a 25-basis-point rate hike by the Fed on September 16. At the time of writing, the US 10-year is at 5.006%
US Dollar climbs as traders almost fully price September Fed hike
Money markets are pricing in a 93% chance of a rate hike, according to Prime Terminal. The jump in US yields is underpinning the Greenback, which, as measured by the US Dollar Index (DXY), is up nearly 0.60%.
The DXY, which tracks the performance of the dollar against six currencies, is at 99.66, after bouncing from 99.07.
Besides the Fed’s decision, investors await an update of the economic projections and the ‘dot-plot’, which could lay the blueprint for the future of the Fed funds rate.
The rise in energy prices due to the escalation of the US-Iran conflict and the Houthis' attack on the Saudi Arabia East-West pipeline triggered a rise in Oil prices amid growing concerns about possible supply disruption.
US 10-year Treasury yield daily chart
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
- EUR/USD stays under pressure as the US Dollar strengthens ahead of this week’s Fed decision.
- Markets increasingly expect the Fed to raise borrowing costs on Wednesday.
- Rising Oil prices keep inflation risks elevated on both sides of the Atlantic.
EUR/USD trades under pressure on Monday, with the Euro (EUR) losing around 0.55% against the US Dollar (USD). The Greenback strengthens across the board as traders position for a possible Federal Reserve (Fed) interest rate hike at the September 15-16 monetary policy meeting. At the time of writing, EUR/USD trades around 1.1525, near its lowest level since August 13.
Expectations for tighter Fed policy gained traction after Friday’s US inflation report showed headline Consumer Price Index (CPI) rising 0.4% MoM in August, accelerating from 0.1% in July. Core CPI increased 0.3%, up from 0.2% and marking its fastest pace in four months. According to the CME FedWatch Tool, markets price in an 86% probability of a quarter-point rate increase, up from around 59.4% a week earlier.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 99.66, up roughly 0.58% on the day and at its highest level since September 3. Strategists at Scotiabank note that the firm tone in the USD ahead of the FOMC is consistent with derivatives market signals, pointing out that “in recent years, swaps pricing which indicated 70% or higher risk of a Fed rate move has been a near perfect indicator of a policy move, so dollar gains in response to swaps pricing is understandable.”
They caution, however, that “there are still some risk around the outlook,” stressing that the currency’s reaction will hinge on how the Fed delivers any change in policy. In their view, “an unchanged decision from the Fed would be a shock for markets and a clear negative for the USD,” while even a “dovish” hike “which does not obviously commit to additional moves would also likely weigh on the USD.”
Rising Oil prices are adding to inflation concerns and putting further pressure on the Fed to raise borrowing costs. West Texas Intermediate (WTI) Oil trades near the $100 mark, having gained more than 15% so far this month.
Elevated Oil prices have also complicated the Eurozone inflation outlook. Last week, the European Central Bank (ECB) delivered its second rate hike of the year, lifting the deposit facility rate to 2.50%. ECB Executive Board member Isabel Schnabel said on Monday that recent energy-price developments are “quite concerning,” while policymaker Yannis Stournaras said timely action reduces the risk of more painful rate increases later.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Royal Bank of Canada (RBC) economist Abbey Xu notes that Canadian inflation stayed at 3% year-over-year in August, with Food and energy components still elevated but easing somewhat. Core measures such as Consumer Price Index (CPI) excluding food and energy and the Bank of Canada’s (BoC) CPI-trim and CPI-median remain near the 2% target. Xu argues this supports the base case that the Bank of Canada keeps rates unchanged through 2026 before gradual hikes in 2027, though persistent Oil strength could tilt risks toward earlier tightening.
Inflation and rate outlook in focus
"Canadian inflation held at 3% year-over-year in August, unchanged from July."
"Underlying inflation pressures remained comparatively contained."
"There continued to be limited evidence that elevated energy costs were generating significant second-round inflation."
"The risk of greater pass-through will rise the longer oil prices remain elevated, making the breadth and persistence of underlying price pressures more important than month-to-month movements in headline inflation."
"The August report was broadly consistent with our base case that the Bank of Canada will hold interest rates through the remainder of 2026 before gradually raising rates in 2027 as the economy strengthens."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
ING economists James Knightley, Padhraic Garvey and Chris Turner now expect a 25bp Federal Reserve rate hike in September following Chair Kevin Warsh’s Jackson Hole remarks. They argue the move will be a one-and-done adjustment rather than the start of a tightening cycle, with weak wage growth and softer housing helping inflation converge to 2% next year and Fed funds ultimately returning to 3.1%.
September move seen as one-off
"We changed our view to a 25bp Federal Reserve rate hike in September in the wake of Chair Kevin Warsh’s address at the Jackson Hole symposium. The data since then has justified that decision. Our projections for jobs and inflation suggest no need for a series of hikes."
"Ordinarily the assumption is that if the Fed hikes, they don’t just go once. Financial markets are now pricing two and a half further rate hikes after the all-but-assured 16 September move. However, this time around we think that one and done might be the case."
"Since the Federal Reserve's last forecast update, we saw a weaker than expected 2Q GDP report, a softer trend in job creation, notwithstanding the August surprise, while inflation has shown some encouraging signs of decelerating, even if the year-on-year rate remains above 2%. We continue to argue that weak wage growth, tariff refunds and a stagnant housing market, which will slow shelter inflation, will all contribute towards a convergence on the 2% inflation target next year. The risk is energy prices."
"In general though, we expect the Fed to project slightly lower inflation than they had in their June forecast while the GDP and labour metrics are little changed. We expect them to have 4% as their end 2026 and end 2027 Fed funds forecast before it heads to their previous long-run projection for the Fed funds rate of 3.1%."
"Yet the dollar does not need to rally too far. After all, we think this is a recalibration of Fed policy, not a new cycle. And our house view remains for the dollar to decline through next year – especially in the second quarter when US inflation is back down to target and money markets can switch their focus to easing from tightening."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
Scotiabank strategists Shaun Osborne and Eric Theoret note the British Pound (GBP) is softer against the Dollar but still outperforming most G10 currencies in a risk-off environment. Markets expect a hawkish hold from the Bank of England (BoE) on Thursday, with a possible 25 bp hike in November. The analysts point to supportive UK-US yield spreads and see technical support around 1.3450–1.3420, with resistance above 1.3550.
Sterling softer ahead of BoE
"The pound is soft, down 0.3% vs. the USD while outperforming most of the G10 currencies in an environment of broad-based risk aversion and USD strength. The focus for the pound this week will center on domestic risk as market participants look to Thursday’s BoE where policymakers are widely expected to deliver a hawkish hold while leaning toward a 25bpt hike at the next meeting in early November."
"The fundamental release schedule is also relatively heavy and includes Tuesday’s jobs and Wednesday’s CPI ahead of the central bank decision, followed by retail sales on Friday. Fundamentals remain supportive as we note the clear uptrend in UK-US yield spreads since early July. Political developments have been limited despite high profile coverage of UK plans for potentially higher taxes on banks. The medium-term risk event is the fall budget scheduled for October 28."
"Neutral—the latest pullback in spot is notable and the local early September low has been marginally (and only briefly) breached, with support offered by the 50 day MA at 1.3481. The chart offers additional support at 1.3450 and 1.3420 with near-term resistance expected above 1.3550."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- British Pound retreats against a resurgent US Dollar on Monday.
- Investors brace for monetary policy decisions in the US on Wednesday and the UK on Thursday.
- Markets widely expect a Fed rate hike, while the BoE is set to leave rates unchanged.
GBP/USD extends its decline on Monday and trades around 1.3470 at the time of writing, down 0.38% on the day. The pair falls to the lower end of its monthly range, weighed down by renewed demand for the US Dollar (USD) ahead of several major monetary policy decisions.
Investors’ attention is primarily focused on the US Federal Reserve (Fed) meeting, with its interest rate decision due on Wednesday. Expectations of tighter monetary policy have strengthened following the latest US inflation data. According to the CME FedWatch tool, markets are pricing in around an 88% chance of a 25-basis-point rate hike this week.
Beyond the decision itself, investors will closely monitor Fed Chair Kevin Warsh’s press conference for fresh clues about the future path of US interest rates. A message leaving the door open to further rate increases could provide additional support to the US Dollar and keep GBP/USD under pressure.
On the UK side, the Bank of England (BoE) will announce its monetary policy decision on Thursday. Most economists expect the central bank to leave its policy rate unchanged at 3.75%. BoE Governor Andrew Bailey recently sought to temper expectations of an automatic tightening of monetary policy, stressing that any future rate increase would depend on economic and geopolitical developments.
British Pound (GBP) nevertheless finds some support from relatively solid UK economic data. The UK Gross Domestic Product (GDP) expanded by 0.4% in July, beating expectations for stagnant activity. Industrial Production also surprised to the upside, while services activity proved stronger than expected.
Despite these encouraging figures, GBP/USD remains primarily driven by monetary policy expectations at the start of the week. The Fed’s decision on Wednesday and the BoE’s announcement on Thursday, along with their respective guidance on the future path of interest rates, are likely to determine whether the US Dollar can maintain its recent advantage or the British Pound can regain ground.
GBP/USD technical analysis
In the one-hour chart, GBP/USD trades at 1.3472, retaining a bearish near-term bias as the pair holds beneath both the 100-period simple moving average (SMA) at 1.3529 and the 200-period SMA at 1.3524. A downward-sloping resistance trend line, whose break level comes in around 1.3517, continues to cap recovery attempts, while the Relative Strength Index (14) slips into oversold territory near 29, hinting that selling pressure is stretched but not yet reversed.
On the topside, initial resistance is located at the horizontal barrier around 1.3480, followed by the trend-line break area at 1.3517 and then the 200-period SMA at 1.3524, with the 100-period SMA at 1.3529 reinforcing a broader supply zone overhead. On the downside, immediate support is seen at 1.3464, ahead of a lower horizontal floor near 1.3434, where a deeper pullback could pause if bears extend control.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Commerzbank’s FX Research team, including Charlie Lay and Dr. Henry Hao, highlight that Brent crude has surged on Strait of Hormuz hostilities but see scope for gradual de-escalation in coming months. They argue covert tanker transits should allow Gulf oil shipments to recover, while petroleum products and natural gas face a more prolonged supply squeeze and less favorable outlook.
Covert flows temper supply shock
"The price of Brent crude oil has risen sharply as a result of the recent hostilities in the Strait of Hormuz. This makes a formal agreement between the fighting parties even less likely than before. But even without a diplomatic solution, a gradual de-escalation is likely to begin in the coming months, and thanks to tankers’ covert transits through the strait, oil shipments from the Gulf region should gradually recover."
"The outlook for petroleum products and natural gas is less favorable. Here, disruptions to transportation and production are likely to continue to limit supply for some time to come."
"For early Asian trading, the key variable will again be oil. Friday's Wall Street rebound reflected relief as Brent retreated from USD110. However, the subsequent Saudi pipeline shutdown, Houthi capture of Perim Island, and postponement of the Hormuz talks have renewed supply concerns."
"Brent crude oil prices fell 2.8% to USD104.61 last Friday but still gained 8.7% last week. This was on top of the near 8% gain the previous week, leaving Brent up 17% over the past two weeks."
"In Asia, the Middle East energy shock remains the dominant external risk. Net oil importers face a renewed deterioration in their terms of trade, while higher fuel prices threaten to complicate the inflation outlook and constrain monetary-policy easing across the region."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
DBS Group Research’s Philip Wee argues that the Euro has a subtle advantage over the Dollar this week, as the European Central Bank’s recent hikes and focus on inflation underscore its institutional credibility. In contrast, the Federal Reserve’s stance is clouded by political pressures and lack of forward guidance, leaving EUR/USD sensitive to any Fed disappointment on rates and yields.
ECB credibility supports Euro
"The EUR has a subtle advantage over the USD this week. Last week’s governing council meeting reinforced the European Central Bank’s willingness to deliver the monetary policy needed to return inflation to target. Despite two hikes in June and September, the EUR-positive case is less about the ECB’s hawkishness than its institutional credibility."
"Faced with resurgent oil prices, the ECB has prioritized above-target inflation over the risks to a resilient Eurozone economy. Fiscal concerns remain in France and Italy, but the ECB appears less constrained by domestic political considerations."
"The contrast with the Fed is becoming hard to ignore. Fed Chairman Kevin Warsh has similarly stressed the need to restore price stability, but his rejection of forward guidance has left markets with less clarity over the Fed’s reaction function."
"Hence, a hawkish Fed is no longer unambiguously USD-positive."
"With a US rate hike now heavily discounted, a Fed hold would force a potentially sharp repricing, pulling the USD lower."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
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