Forex News
Societe Generale economists Sam Cartwright and Michel Martinez analyze how renewed supply chain disruptions, including conflict in the Middle East, may affect Euro Area prices. Using an adaptation of the New York Fed’s Global Supply Chain Pressure Index for Europe and Asia, they highlight still-elevated pressures, firmer demand and a projected peak in Euro Area non-energy industrial goods inflation at 1.8% in 2H27.
Supply strains and inflation outlook
"Following the Covid pandemic in 2020-21 and the supply chain disruptions triggered by the war in Ukraine since 2022, the recent conflict in the Middle East has renewed concerns about the resilience of European supply chains."
"In this note, we try to quantify the degree of supply pressure in Europe and its impact on inflation."
"We adapt the New York Fed Global Supply Chain Pressure Index (GSCPI) to construct separate indices for Europe and Asia, revealing a distinct response to disruptions to trade flows through the Strait of Hormuz:"
"Supply chain pressures have been easing this summer, but they remain elevated and are likely to feed through to inflation this year and next."
"Under different forecast scenarios, even if supply pressures continue subsiding in the coming months, our euro area non-energy industrial goods inflation forecast peaks at 1.8% in 2H27 before normalizing."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- The US Dollar is bid across the board ahead of the Fed’s Wednesday decision.
- AUD/USD has broken to a new monthly low, handing back the last of its late July rally.
- China will start the Asian session with its August activity data.
AUD/USD slipped to a new monthly low in the 0.7100s on Monday, driven by a firm run of United States (US) data that has pushed the market toward pricing in a Federal Reserve (Fed) rate hike at its meeting later this week.
After a firm Producer Price Index (PPI) and Consumer Price Index (CPI) last Friday, the market has moved to price a rate hike at 90%, up from around 60% a week ago.
Higher Oil prices, which often help commodity currencies, are not offsetting the move. The pull on the Aussie is coming from the other side. Risk appetite has soured with US stock index futures pointing sharply lower on renewed worries about AI-related names, and soft Chinese lending data did nothing to help sentiment toward China-linked currencies.
China opens the Asian session with its August activity batch. The consensus looks for Industrial Production to pick up to 4.8% YoY from 4.5%, and for Retail Sales to rise to 0.8% from 0.6%.
Short-term technical analysis:
On the 4-hour chart, AUD/USD trades at 0.7119, extending its slide beneath both the 20-period and 100-period Simple Moving Averages (SMAs), which cap the pair at 0.7177 and 0.7179, respectively, and reinforce a bearish near-term bias. The recent drop has pushed the 14-period Relative Strength Index (RSI) into oversold territory near 22, hinting that while downside pressure remains dominant, selling momentum could be stretched in the short term.
On the topside, initial resistance emerges at 0.7125, followed by the nearby horizontal barriers at 0.7131 and 0.7137, before the clustered SMA zone around 0.7177–0.7179. On the downside, immediate support is defined by the horizontal level at 0.7108, and a clear break below this floor would open the path for an extension of the current bearish sequence.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Scotiabank strategists Shaun Osborne and Eric Theoret highlight a weaker Japanese Yen (JPY), down 0.7% versus the US Dollar (USD) and underperforming G10 peers alongside New Zealand Dollar (NZD) and Swedish Krona (SEK). Markets are focused on Friday’s Bank of Japan (BoJ) meeting, where a hike is seen as fully priced. For USD/JPY, they flag recent lows around 153, additional support near 152, and resistance above 155, with trade and Consumer Price Index (CPI) data also due.
Key BoJ week levels
"The yen is weak, down a notable 0.7% vs. the USD and underperforming most G10 currencies along with the high-beta pro-risk NZD and SEK."
"The relative performance suggests a focus on factors beyond sentiment, as market participants eye Friday’s BoJ and its widely anticipated and fully priced hike."
"Fundamental releases have been limited, though we note Wednesday’s trade and Friday’s CPI data. For USD/JPY, we continue to note the recent lows around 153 and see additional support closer to 152."
"We see resistance above 155."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
Pfister and Liebke analyse 30 years of FOMC meetings to separate interest rate surprises from forward guidance shocks and their effect on the US Dollar and G10 currencies. They find guidance surprises explain a much larger share of USD variance, especially in policy shocks, and show how this relationship evolved under Greenspan, Bernanke, Yellen and Powell.
Guidance versus rate surprises
"Forward guidance does not always have the same effect. Breaking down the FOMC surprises into policy shocks (where equities and interest rates move in opposite directions) and information shocks (where both move in the same direction), as Jarociński and Kaladi (2020) do, shows that the forward guidance factor is only highly significant in the case of policy shocks, explaining roughly 21% of the USD variance on the respective day."
"By contrast, the trend under Powell’s predecessors follows a clear pattern: during the latter part of Alan Greenspan’s tenure and under Ben Bernanke’s chairmanship, our breakdown of interest rate and forward guidance surprises accounted for only a small proportion of USD variance on meeting days. Under Janet Yellen, however, this figure more than doubled, with the two components accounting for almost 39% of the daily variance."
"Under Jerome Powell, the explained variance of our decomposition collapsed completely, rendering both factors insignificant. At first, this seems confusing; after all, forward guidance became even more important under Powell than under his predecessors. But the answer is quite simple."
"The trend of shifting information from the statement to other components of the FOMC meeting has intensified in recent years. For the last 21 meetings since early 2024 (two under Warsh and 19 under Powell), the daily change in OIS on the day of the meeting has accounted for around 62% of USD variance."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
TD Securities strategists Ryan McKay and Bart Melek note that CTAs remain maximally long WTI Crude, Brent Crude, diesel and gasoline as attacks on energy infrastructure in Saudi Arabia and Russia sustain a significant upside risk premium. Supply risks remain elevated after Saudi Arabia's East-West pipeline was damaged, with reports indicating that much of the system could remain out of service for three to five weeks, while the threat of further Houthi strikes adds to tightening risks.
Pipeline risks sustain CTA long bias
"Upside risks across crude oil and products remain extremely elevated amid energy infrastructure attacks in the Middle East and Russia."
"CTAs remain max long across crude oil, diesel and gasoline markets, with only vol levels constraining positioning at this point."
"supporting an upside risk premium in crude oil pricing, while continued Ukrainian attacks on Russian refineries further tighten the diesel market."
"However, if repairs stretch beyond that, flow rates are materially reduced, or if further attacks occur, the market would tighten materially."
"The market has been much more balanced of late amid flows from the broader Middle East region hitting 80-90% of pre-war crude totals (including Hormuz, Gulf of Oman, Oman, Fujairah and Yanbu), alongside still reduced refinery runs, but the risks of continued attacks limiting supply, or a recovery in refinery runs as Chinese appetite picks up, have seen a risk premium remain priced in."
(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 report the Euro (EUR) is weaker, down about 0.5% versus the US Dollar (USD), as risk aversion supports broad USD strength. Yield spreads imply a fair value near 1.1633, while data have been light ahead of Tuesday’s ZEW survey. They highlight major support around 1.15 and only limited near-term resistance before 1.1650, with European Central Bank (ECB) rhetoric turning more hawkish on energy-driven inflation.
Euro pressured by sentiment
"The EUR is weak and entering Monday’s NA session with a notable 0.5% decline a mid-performer among the G10 currencies in an environment of broad-based USD strength marked by risk aversion. Sentiment is dominating as yield spreads remain relatively well supported, offering a narrow FV estimate based solely on yield spreads (2Y Germany-US) at 1.1633."
"Fundamental releases have been limited and we continue to highlight the importance of Tuesday’s ZEW investor sentiment survey, a noted leading indicator for industrial production (by about 12-18 months)."
"Hawkish comments from the ECB appear to be intensifying in response to the latest rise in energy prices, with Executive Board member Schnabel characterizing the increase as ‘quite concerning’."
"The latest decline has dragged momentum into the low 40s, reflecting spot’s decline to its 50 day MA at 1.1531. We see major support at 1.15 and see limited near-term resistance ahead of 1.1650."
"Neutral/bearish – the RSI has swiftly fallen into bearish territory following a brief push above the overbought threshold at 70—reached in late August."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
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.)
- US 10-year yield tops 5% for the first time since 2023
- Fed hike odds reach 93%, lifting the US Dollar toward ten-day highs
- Dot plot and energy shock now shape post-FOMC yield path
The US 10-year Treasury yield has breached the 5% threshold on Monday for the first time since 2023, rising by more than four basis points as investors almost fully price in a 25-basis-point rate hike by the Federal Reserve (Fed) on Wednesday. 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 to economic projections and the dot plot, which could lay the blueprint for the future of the Fed funds rate.
The rise in energy prices, driven by 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.)
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