Forex News

Deutsche Bank Research’s UK economists Sanjay Raja and Maui Brennan have shifted their BoE base case from no hikes to two 25bp moves, in November and February. They argue Bank Rate is already restrictive, inflation is largely energy-driven, and second‑round effects remain limited. As long as the energy shock persists, they expect only modest ‘insurance’ tightening rather than an aggressive cycle.

Bank Rate seen as already restrictive

"We officially changed our call for the BoE. Following the September decision, we shifted our baseline from no hikes to two quarter-point rate hikes (one in November and another in February)."

"Acknowledging the above, we do not think that the current inflation wave, as we see it, will push the MPC into an aggressive tightening cycle. For us, the MPC’s reaction function may be more consistent with a modest tightening cycle – akin to two (and no more than three) quarter-point insurance rate hikes (should energy prices follow their expected market expectations). Why do we see modest insurance-style rate hikes as our basecase?"

"The BoE has room to manoeuvre. Almost all the centrist MPC members think Bank Rate sits above their loose judgements of neutral (3-3.5%). With Bank Rate at 3.75%, Bank Rate in their eyes is already restrictive (unlike, say, the ECB which has only just taken rates to the very top end of its neutral rate range). Put simply, a slow easing cycle over the last two years has given the MPC more space to operate in the current inflationary wave with restrictive policy already leaning on inflationary pressures."

"Policy rules suggest only a modest tightening. Our Taylor Rule estimates (contemporaneous, forward-looking and first difference) point to somewhat higher estimated policy rates, lying only a bit above 4%. These changes reflect higher-than-expected outturns in GDP and a firmer outlook for inflation. However, these mechanical rules imply only a modest increase in Bank Rate - a far cry from the aggressive hiking cycle experienced in 2022."

"So, what’s changed? The MPC’s patience around the unfolding energy shock. The longer CPI tracks at uncomfortably high rates, the higher the likelihood that second-round effects build. Put simply, we think the MPC may embark on a modest tightening cycle as an insurance policy against second-round effects. That said, should we see a rapid repricing in energy markets to lower energy prices in the coming weeks, the case for hikes may start to weaken."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

OCBC strategists Sim Moh Siong and Christopher Wong argue that intervention risks and a more hawkish Bank of Japan (BoJ) are key for the Japanese Yen (JPY). They see faster BoJ policy tightening gradually supporting JPY and increasing the likelihood that USD/JPY ends the year closer to 150–155, rather than its current 160 forecast, even as thinner holiday liquidity raises near-term volatility risks.

BoJ tightening to bolster Japanese Yen

"USD/JPY has rebounded above 157 after briefly slipping below that level following reports of a BoJ rate check last week. Intervention risks have risen again and should help limit excessive JPY weakness. With Japanese markets closed today and tomorrow for public holidays, thinner market liquidity could also lead to greater JPY volatility."

"The BoJ's 7-2 vote split in favour of a rate hike may remain a near-term headwind for the JPY. However, the more important takeaway is that the BoJ appears increasingly willing to tighten policy at a faster pace. This shift should ease concerns that the BoJ is falling behind the curve."

"Over time, that should provide stronger support for the JPY. Previously, fears that the BoJ was behind the curve weakened the relationship between USDJPY and US-Japan yield differentials."

"Taken together, these developments increase the likelihood that USD/JPY ends the year closer to 150-155 rather than our current forecast of 160. Should the JPY strengthen, the low-yielding CHF is likely to remain the preferred funding currency. This view is reinforced by our expectation that the SNB keeps policy rates at 0% through at least yearend."

"Progress in channelling domestic savings into Japanese assets has been limited so far, although we expect further policy initiatives to support this objective."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• AUD/USD trims earlier losses as fresh US-Iran diplomatic signals weigh on the US Dollar.
• Expectations of further Fed tightening continue to offer some support to the US Dollar.
• A hawkish RBA outlook keeps the Aussie supported ahead of next week’s policy meeting.

AUD/USD trims part of its earlier losses on Tuesday as traders assess fresh diplomatic signals surrounding the war between the United States (US) and Iran, weighing on the US Dollar (USD). Meanwhile, a hawkish Reserve Bank of Australia (RBA) outlook continues to provide a firm floor under the Australian Dollar (AUD). At the time of writing, AUD/USD trades around 0.7107, down 0.15% on the day after touching an intraday low of 0.7092.

Iran has offered to reopen the Strait of Hormuz within seven days if the US lifts its blockade of Iranian ports and eases military pressure, according to a senior Iranian official cited by Kyodo News. Markets are also watching the UN General Assembly in New York. US President Donald Trump and Iranian President Masoud Pezeshkian are both attending. Washington says no direct meeting is scheduled so far, while Trump is due to meet several Gulf leaders later on Tuesday.

The development weighs on the US Dollar while also pushing Oil prices lower. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 100.45 after retreating from an intraday high of 100.67, its highest level since July 30. Meanwhile, West Texas Intermediate (WTI) Oil trades near $89.50 and is down more than 5% so far this week.

The downside in the US Dollar, however, remains cushioned by expectations of additional Federal Reserve (Fed) rate hikes. The US central bank raised rates by 25 basis points last week to 3.75%-4.00% and signalled that further tightening may be needed to bring inflation back toward its 2% target. Fed Chairman Kevin Warsh said after the meeting that he would be “hard-pressed to describe broad financial conditions as restrictive.”

On the US economic data front, the latest ADP NER Pulse showed private employers added an average of 20,000 jobs per week over the four weeks ending September 5, up from 16,750 previously

Meanwhile, the Australian Dollar continues to draw support from a hawkish RBA outlook. The central bank has raised rates three times this year, lifting the cash rate to 4.35%, while core inflation remains above its 2%-3% target range.

RBA Governor Michele Bullock said on Tuesday that “upside inflation risks may be materialising,” while stressing that she was “not indicating any policy shift” and that the decision remains with the board. Bullock also said the Australian Dollar “mirrors commodities and interest rate gaps,” adding that neutral rates are rising globally and pushing real bond yields higher.

Markets are pricing in around a 95% chance of another 25-basis-point rate hike to 4.60% at the September 29 meeting. If the RBA raises rates again next week, the wider interest-rate gap with the US could provide additional support to the Aussie.

ING’s Francesco Pesole notes the Dollar started the week strongly despite lower Oil prices and firmer global equities, helped by hawkish remarks from Federal Reserve officials Austan Goolsbee and Alberto Musalem that supported US front-end rates. He argues near-term risks for the Dollar are skewed higher, with DXY potentially reaching 101.0 before month-end, while the US data calendar stays light.

Fed rhetoric keeps Dollar supported

"The dollar had a strong start to the week despite a decline in oil prices and strong risk sentiment. In our view, part of the move reflected a catch-up to levels seen before Friday’s reported Bank of Japan rate check, which had damaged USD momentum across the board."

"Hawkish Fed commentary was however the clearest driver. Chicago Fed President Austan Goolsbee warned that supply shocks, combined with strong spending and AI-related investment, could keep inflation persistent. He added that the path back to 2% inflation may not be painless."

"Later in the day, St. Louis Fed President Alberto Musalem reinforced the hawkish message, arguing that front-loaded gradual tightening is preferable and that policy remains accommodative. Musalem is seen as one of the more hawkish members and may be among the four officials who projected two additional hikes this year in the dot plot, although he is also a non-voter."

"The comments supported front-end USD rates on a day when Brent briefly slipped below $100/bbl, pulling other G10 rate expectations lower. Fedspeak will continue to have the potential to break the oil-USD relationship during periods of falling energy prices, as the Fed is viewed as being more fundamentally focused on inflation while other developed central banks are seen as more sensitive to oil price dynamics."

"Yesterday’s price action has reinforced our view that near-term risks for the dollar remain skewed to the upside. DXY may be headed to 101.0 already before the end of the month."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

Standard Chartered’s Nicholas Chia now expects the Reserve Bank of Australia (RBA) to raise the cash rate to 4.60% at its 29 September meeting, revising a previous call for a hold. Chia cites recent RBA messaging focused on upside inflation risks and resilient economic momentum. It also delays the projected start of RBA rate cuts to Q3-2027 from Q1-2027.

RBA path revised with later cuts

"We now see the Reserve Bank of Australia (RBA) raising the cash rate to 4.60% at its 29 September meeting, above the cycle high of 4.35%. We previously expected it to stay on hold through the remainder of 2026 (see RBA – Keeping all options on the table). We had expected nascent indications of labour and housing-market weakness to keep underlying price pressures in check and temper RBA hawkishness."

"However, recent RBA messaging suggests it is highly attuned to the materialisation of upside risks to inflation, with oil prices near triple digits and the AI boom adding to price pressures, worsening the policy trade-off for the RBA."

"We think this removes an impediment to further policy tightening, irrespective of the outcome of the August labour-market report (due on 24 September). Aggregate economic momentum appears to be holding up, despite the three rate hikes thus far, and the central bank is likely to consider the current policy stance as modestly restrictive."

"We do not preclude further RBA hikes in Q4, but this would likely be conditional on an upside surprise in the Q3 CPI print (to be released in late October) and continued resilience in growth and spending."

"We also push back our forecast for the first RBA rate cut to Q3-2027 (from Q1-2027 prior). The central bank is likely to take a more cautious view of incoming data and await sustained evidence of below-trend growth before considering policy easing."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• US private employers added an average of 20K jobs per week in early September.
• Job gains pick up momentum, adding to the previous week’s uptick.

Private-sector hiring in the US has gained some pace in early September. According to the NER Pulse, the weekly companion to the ADP National Employment Report, companies added an average of 20K jobs per week in the four weeks ending September 5.

That marks an acceptable rebound from the prior reading (16.75K), showing extra recovery in hiring.

Market reaction

The Greenback trades slightly on the defensive on Tuesday, hovering around the 100.40 region when gauged by the US Dollar Index (DXY) in the wake of the release.

Brown Brothers Harriman’s (BBH) Elias Haddad highlights that GBP/USD remains under 1.3400 as United Kingdom (UK) fiscal policy turns more restrictive. Rising borrowing has eroded fiscal headroom, pressuring Chancellor John Healey to tighten via taxes and spending cuts. BBH concludes a stronger fiscal squeeze could reduce the need for Bank of England (BoE) rate hikes, leaving the British Pound (GBP) exposed to a dovish repricing of BoE expectations.

Tighter budget may cap BOE hikes

"GBP/USD is trading heavy under 1.3400. UK fiscal policy is poised to become more restrictive. The UK government borrowed £18.3bn in August, up £2.9bn from August 2025 and £3.5 billion above the Office for Budget Responsibility forecast."

"Meanwhile, higher borrowing costs are estimated to have halved the government’s fiscal headroom to around £12bn. That leaves Chancellor John Healey under pressure to raise taxes and cut spending to deliver his promised “buffer against uncertainty” in the October 28 Autumn Budget."

"Bottom line, a tighter UK fiscal squeeze suggests the BoE may not need to raise the policy rate as much as markets expect (100bps in the next twelve months to 4.75%). As such, GBP is vulnerable to a dovish BoE repricing."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

MUFG’s Lee Hardman reports the Euro (EUR) is trading on a softer footing against the US Dollar, with EUR/USD near the bottom of its 1.1400–1.1800 range. Markets expect three to four more European Central Bank (ECB) hikes, supported by ECB Chief Economist Lane’s view of a second wave of energy-driven inflation. French fiscal and political risks are increasingly priced into wider spreads and potential rating downgrades.

EUR pressured by Dollar and French spreads

"The euro is continuing to trade on a softer footing against the US dollar in the near-term hitting a low overnight at 1.1459. The pair is moving back towards the bottom of the 1.1400 to 1.1800 trading range that has been in place over the past year since last week’s FOMC meeting. Market expectations for an extended ECB tightening cycle are helping to offset the hawkish repricing of Fed rate hike expectations."

"The euro-zone rate market also expects the ECB to deliver three to four more hikes in the year, with over a 50:50 probability of another back-to-back hike in October priced in. ECB Chief Economist Lane has told Le Temps newspaper that “we are now witnessing a second wave of price rises, not only in oil but also in gas. We believe this second wave of energy price rises should lead to higher and more persistent inflation, before a decline toward our target from mid-2027 onwards”."

"He believes “the second wave of energy price rises we are witnessing today should exert upward pressure on food prices, on energy in the broader sense including electricity and on goods in general”. But remains optimistic that “pressure on services, on the other hand, should remain contained”. He expects the euro-zone economy to continue to grow at a steady but moderate pace, provided the energy price shock does not intensify”."

"Building fiscal and political risks in Europe remain in focus but so far there appears to have been limited negative spillover impact on the euro. Bigger moves have happened elsewhere with the yield spread between French and German 10-year government bond widening above 100 bps this month. France was downgraded by one of the minor rating agencies, Scope Ratings at the end of last week who cited concern over a “sustained deterioration in the fiscal outlook, characterized by rising general government debt, persistently high fiscal deficits and limited progress on structural reforms”."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)