11/09/2025 Market Watch

Dollar Recovery Ahead of Key Events

Key Takeaways:

  • Dollar regains strength ahead of US CPI and ECB policy meeting.
  • Markets reassess Fed expectations, with headline CPI pivotal.
  • French assets firm, Fitch credit review of France pending.
  • Global equities mostly higher, led by Japan and China.
  • Gold eases from record high, oil steadies near $63.50.

The US dollar is trading firmer today as investors await two key drivers, the US CPI report and the European Central Bank’s policy decision. After touching a new low for the year against the Chinese yuan earlier in the session, the greenback has recovered, extending gains against both major and emerging market currencies. Current market pricing reflects only a modest chance, around 10%, of a 50 bp rate cut next week, but a fourth consecutive increase in headline CPI could shift expectations and support further dollar strength.

Attention in Europe remains fixed on the ECB meeting. The central bank is widely expected to keep rates unchanged, while providing updated macroeconomic forecasts. Meanwhile, France remains in focus as the newly appointed prime minister holds coalition talks. French bonds have stabilized, with the 10-year premium over Germany narrowing, while French equities are outperforming their German counterparts. Fitch’s review of France’s AA- rating with a negative outlook is due tomorrow. Across Europe, 10-year yields are steady to slightly firmer, except for France and Italy.

In the United States, Treasury yields have edged off recent lows. The 10-year yield fell to a five-month trough just above 4.02% yesterday before ticking back up toward 4.04%-4.05% today. Equity markets are broadly positive, with Japan’s Nikkei setting a new record high and China’s CSI 300 rallying 2.3%, its best performance since March, led by AI-related shares. In contrast, Hong Kong and Australia lagged behind. Europe’s Stoxx 600 rebounded from yesterday’s losses, while US futures point to firmer trade.

Commodities are more mixed. Gold has retreated from its record high of nearly $3675 earlier this week, sliding below $3620 and finding initial support near $3600. Oil markets are steady after three sessions of gains supported by geopolitical tensions in the Middle East and Eastern Europe. October WTI is little changed, holding around $63.50.

United States of America

Overview

The Dollar Index traded within a volatile range of 97.60 to 95.00 yesterday and is now edging toward 98.00 in late European trading. A break above 98.25 would improve the technical outlook. The market remains focused on the upcoming CPI release, which carries more weight than yesterday’s PPI report. The softer PPI data showed a 0.1% decline at both headline and core levels last month, while July’s figure was revised lower from 0.9% to 0.7%. Although the dollar briefly weakened after the release, it recovered to end the session little changed.

The CPI reading is viewed as more significant due to its policy impact and its role in shaping the PCE deflator, the Fed’s preferred measure. A 0.3% increase in headline CPI would raise the annual rate to 2.9%, the highest since January. However, because of base effects, the same monthly increase in the core CPI would keep the annual rate steady at 3.1%. This comes against the backdrop of the Fed’s September 2024 50 bp rate cut, which followed several months of easing inflation. Headline CPI had peaked at 3.5% in March 2024 before falling to 2.5% in August.

Economic Drivers

  • Softer-than-expected PPI data highlights weaker inflationary pressures.
  • Upcoming CPI expected to be pivotal for Fed policy direction.
  • Base effects influencing the year-over-year CPI and core readings.
  • Previous Fed action included a 50 bp cut in September 2024 after months of declining inflation.

Data and Events

  1. 11 September 2025: CPI
  2. 11 September 2025: Unemployment Claims

Price Action

  • Dollar Index traded in a 97.60–95.00 range yesterday.
  • Resistance seen at 98.25, a break above could strengthen the technical outlook.
  • Session low occurred shortly after PPI release, but the index recovered by the close.

Key Points:

  • Dollar Index edging toward 98.00 ahead of CPI release.
  • CPI data more influential than PPI in shaping Fed outlook.
  • Softer PPI adds to evidence of cooling inflation.
  • Headline CPI could reach 2.9% year-over-year, the highest since January.
  • Fed previously cut rates in September 2024 following a decline in inflation.

Europe

Overview

The euro came under pressure yesterday after reports that Poland had shot down Russian drones in its airspace, which led Warsaw to invoke Article 4 of the NATO treaty requiring consultations. The single currency briefly dipped below $1.1685 before recovering toward $1.1730 late in the session, though it ended the day little changed. In today’s European session, the euro has spent limited time above $1.1700 and is now slipping back through yesterday’s low, keeping sentiment weak. A break below $1.1650 would deteriorate the near-term technical outlook.

Attention now turns to the European Central Bank meeting. No policy change is expected, and President Lagarde is unlikely to offer strong forward guidance. She may face questions on the widening French yield premium, but the ECB is expected to emphasize that it has tools to address risks to policy transmission if required. The meeting will also deliver updated economic projections. June’s forecasts anticipated GDP growth of 0.9% this year, 1.1% in 2026, and 1.3% in 2027. With Q1 growth at 0.6% and Q2 at 0.1%, the 0.9% target implies only modest momentum in the second half of the year. On inflation, the ECB previously projected CPI at 2.0% in 2025, 1.6% in 2026, and 2.0% in 2027.

Economic Drivers

  • Poland’s downing of Russian drones and NATO Article 4 consultations weighed on sentiment.
  • Limited eurozone growth prospects, with forecasts suggesting weak activity in the second half of 2025.
  • ECB policy expected to remain unchanged, with little forward guidance.
  • Inflation outlook broadly steady, with CPI seen returning to target by 2027.
  • Concerns about widening French yield premium, though ECB likely to stress policy tools are available.

Data and Events

  1. 11 September 2025: Main Refinancing Rate
  2. 11 September 2025: Monetary Policy Statement
  3. 11 September 2025: ECB Press Conference

Price Action

  • Euro recorded session low near $1.1685 during geopolitical headlines.
  • High reached near $1.1730 but ended little changed.
  • Currently slipping below $1.1700 and testing prior lows.
  • A break under $1.1650 would weaken near-term technical outlook.

Key Points:

  • Euro pressured by geopolitical tensions in Poland and NATO involvement.
  • ECB meeting expected to keep policy unchanged with updated forecasts.
  • Growth outlook signals weak momentum in H2 2025.
  • Inflation path broadly steady, aiming for 2% by 2027.
  • Technical picture vulnerable below $1.1650.

Japan

Overview

The dollar was steady against the yen for most of yesterday, trading in a narrow JPY147.25–147.45 range after some brief movement around the US PPI release. In today’s European session, the greenback has regained momentum and is pushing toward JPY148. A further rise in US yields after the CPI release could extend gains toward JPY148.50.

On the domestic side, Japan reported a 0.2% decline in producer prices last month. Despite the monthly slip, the year-over-year rate accelerated to 2.7% from 2.5%. The data had little influence on expectations for the Bank of Japan. The BOJ meets next on September 18–19, with markets assigning little probability to a rate hike. Swaps currently price in 15.5 bp of tightening by year-end, slightly less than the 17 bp at the end of August and 18 bp at the end of July, showing diminishing expectations for meaningful policy adjustment.

Economic Drivers

  • Dollar supported by US yield movements, especially around upcoming CPI data.
  • Japan’s producer prices fell 0.2% month-on-month but accelerated to 2.7% year-over-year.
  • BOJ unlikely to raise rates at its September meeting.
  • Market pricing reflects reduced expectations of BOJ tightening by year-end.

Data and Events

  1. 11 September 2025: PPI

Price Action

  • Dollar traded flat against the yen yesterday within JPY147.25–147.45.
  • Currently pushing toward JPY148 in the European morning.
  • Stronger US yields after CPI could lift the pair toward JPY148.50.

Key Points:

  • Dollar steady against yen but now regaining strength toward JPY148.
  • Producer prices slipped month-on-month but accelerated year-over-year.
  • BOJ expected to keep policy unchanged in September.
  • Market pricing shows fading expectations of BOJ tightening.
  • Technical upside opens toward JPY148.50 if US yields rise.

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