12/09/2025 Market Watch

Dollar Strength Meets Market Consolidation

Key Takeaways:

  • Dollar steadies after CPI-driven decline and rise in jobless claims.
  • US 10-year yield holds above 4% but flat on the week.
  • Yen weakest G10 currency, Canadian dollar most resilient.
  • US stocks face pause after record highs, Asia rallies mixed, Europe soft.
  • Gold consolidates below record, oil rebounds from weekly lows.

After a sharp pullback following the CPI release and rising jobless claims, the US dollar has stabilized. While the gains are modest, the broader move reflects steadier US rates. The 10-year Treasury yield briefly tested the 4% level for the first time in five months, closing slightly higher at 4.04%. Despite fluctuations, the yield remains flat on the week. In currency markets, the Canadian dollar has shown resilience, losing less than 0.1%, while the yen has underperformed, sliding nearly 0.5% as the dollar nears JPY148. Emerging market currencies are mixed, with the JP Morgan EM currency index edging higher for the first time in three weeks and the MSCI EM index advancing for a third consecutive week.

Equities are balancing near record levels, with the S&P 500 and Nasdaq risking the end of their four-day winning streaks. Futures point slightly lower, suggesting some consolidation. In Asia, Chinese equities rebounded while the Nikkei pushed to new highs, and markets in Hong Kong and Taiwan gained more than 1%. Europe’s Stoxx 600 slipped modestly but remains on track for a 1% weekly gain, its first in three weeks. Government bond yields across Europe are pushing higher, setting fresh weekly peaks, with a potential French downgrade by Fitch still looming.

In commodities, gold has eased slightly after touching a record high earlier in the week near $3675, trading around $3645. Oil prices recovered after nearing last week’s lows, with October WTI bouncing back toward $62.85 from earlier weakness. Both markets reflect a cautious but steady tone as investors weigh inflation risks against global growth signals.

United States of America

Overview

The Dollar Index reversed sharply, registering a bearish outside down day after trading both sides of Wednesday’s range before closing below its low. Despite the technical signal, there has been little follow-through selling, leaving the index relatively unchanged for the week. Last Friday, the DXY settled at 97.77 following the employment report.

The week concludes quietly with the preliminary September University of Michigan survey, which is expected to show a modest decline in sentiment, alongside a small improvement in the outlook for current conditions and expectations. Inflation expectations are forecast to soften, adding further weight to the broader market outlook.

Attention now turns to next week’s FOMC meeting. Markets have adjusted Fed expectations significantly, with the implied year-end effective funds rate slipping from nearly 3.75% before the August jobs report to about 3.60% after the release of CPI and a sharp rise in weekly jobless claims. Claims reached their highest level in four years, though distortions linked to the Texas floods and the timing of the Labor Day holiday have been noted.

Speculation is also mounting over Miran’s nomination to the Federal Reserve Board, with expectations that he may favor a more aggressive 50 bp cut compared to the consensus for a quarter point move. Such a stance could heighten concerns over Fed independence, particularly if the president secures a majority on the Board of Governors. In parallel, the Justice Department is pushing for an appeals court decision by Monday to delay a ruling that currently allows Governor Cook to remain in office during her appeal. The broader political backdrop is drawing attention, as the composition of the Board of Governors will also impact the re-confirmation of regional Fed presidents by March next year. Notably, both Governors Waller and Bowman abstained from voting on the confirmation of Chicago Fed President Goolsbee, signaling internal tensions.

Economic Drivers

  • Dollar Index reversed lower but showed no follow-through selling, leaving weekly levels steady.
  • University of Michigan survey expected to show weaker sentiment but stronger current conditions and softer inflation expectations.
  • Implied year-end Fed funds rate fell from 3.75% to 3.60% following CPI and higher jobless claims.
  • Weekly jobless claims rose to a four-year high, distorted by Texas flooding and Labor Day effects.
  • Speculation on Miran’s nomination raising the possibility of dissent for a 50 bp rate cut.
  • Fed independence concerns if the president secures a Board majority.
  • Justice Department seeking to delay ruling on Governor Cook’s appeal status.
  • Upcoming re-confirmation of regional Fed presidents influenced by Board composition.

Data and Events

  1. 12 September 2025: 30-y Bond Auction
  2. 12 September 2025: Prelim UoM Consumer Sentiment
  3. 12 September 2025: Prelim UoM Inflation Expectations

Price Action

  • Dollar Index posted a bearish outside down day, closing below prior lows.
  • Lack of follow-through selling leaves the index broadly unchanged for the week.

Key Points:

  • Dollar Index reversed lower but remains little changed on the week.
  • University of Michigan survey expected to highlight softer sentiment and inflation expectations.
  • Market focus firmly on next week’s FOMC meeting and policy direction.
  • Rising political and governance risks may influence Fed independence.
  • Speculation grows on a potential 50 bp cut versus the consensus 25 bp.

Canada

Overview

The US dollar briefly strengthened against the Canadian dollar, reaching CAD1.3890 yesterday, its highest level since Powell’s Jackson Hole speech in late August. It later reversed, falling to near CAD1.3825, which coincided with a key retracement level of the recent rally. Despite the pullback, the greenback did not close below Wednesday’s low near CAD1.3830, helping limit the downside. The pair remains firm but is holding below CAD1.3850 so far today.

Domestic data releases, including July building permits and Q2 capacity utilization, are not expected to significantly influence the exchange rate. The Canadian dollar’s near-term direction continues to be driven by the broader performance of the US dollar. Market attention is turning to next week’s Bank of Canada meeting, scheduled just before the FOMC. The central bank is widely expected to deliver another 25 bp rate cut, having already cut twice in Q1 before holding steady at 2.75%. Recent weak Q2 GDP figures and soft August employment data have reinforced the case for further easing. The August CPI release, due the day before the meeting, will provide an important signal for policymakers. Market pricing currently reflects a 65% probability of another rate cut before year-end.

Economic Drivers

  • US dollar strength remains the primary driver for CAD direction.
  • Bank of Canada expected to cut rates by 25 bp at its upcoming meeting.
  • Policy rate currently at 2.75% after two cuts in Q1.
  • Disappointing Q2 GDP and weak August employment data increased expectations for further easing.
  • August CPI release will be key for the policy outlook.
  • Swaps market pricing implies around 65% chance of another cut before year-end.

Data and Events

  1. 12 September 2025: Building Permits
  2. 12 September 2025: Capacity Utilization Rate

Price Action

  • US dollar reached CAD1.3890 before reversing to CAD1.3825.
  • Support emerged at CAD1.3825, aligning with retracement levels.
  • Pair holding below CAD1.3850 today after testing recent highs.

Key Points:

  • Canadian dollar remains guided by US dollar trends.
  • Bank of Canada expected to cut rates at its upcoming meeting.
  • Recent weak GDP and jobs data add pressure for policy easing.
  • August CPI release will be critical for rate expectations.
  • Market pricing shows 65% probability of another cut before year-end.

Europe

Overview

The euro recorded a bullish outside up day yesterday, briefly reaching close to $1.1750 before retreating below last week’s settlement level of $1.1715. Despite the pullback, the currency remains on course for its fifth weekly gain in six weeks if it closes above that level today. Market focus has turned to potential rating actions in Europe. Fitch is expected to review France’s AA- rating with risk of a downgrade, while Portugal’s A- rating is under review but carries a positive outlook, following S&P’s upgrade of the country last month.

The European Central Bank left its policy stance unchanged at its latest meeting, suggesting the easing cycle is nearly complete with possibly one final cut remaining. Market pricing reflects only about a 40% chance of further easing next year, equivalent to roughly 10 bp. ECB staff projections were adjusted, with upward revisions to inflation forecasts for this year and next, though the 2027 forecast was slightly reduced. GDP expectations were also revised, with this year’s growth raised to 1.2% from 0.9%, but next year trimmed to 1% from 1.1%. The 2027 outlook was left unchanged at 1.3%.

Economic Drivers

  • Eurozone growth and inflation projections adjusted by ECB staff, with near-term CPI revised higher.
  • ECB maintained steady policy, suggesting easing cycle close to completion.
  • Swaps market pricing shows only about 40% probability of another cut next year.
  • Fitch reviewing France’s AA- rating, with downgrade risk.
  • Fitch also reviewing Portugal’s A- rating, though outlook remains positive after S&P upgrade.
  • Inflation forecast for 2024 raised to 2.1% from 2.0%, 2025 raised to 1.7% from 1.6%, and 2027 lowered to 1.9% from 2.0%.
  • GDP for 2024 revised to 1.2% from 0.9%, 2025 trimmed to 1% from 1.1%, and 2027 unchanged at 1.3%.

Data and Events

  1. 12 September 2025: German Final CPI

Price Action

  • Euro posted a bullish outside up day.
  • Briefly traded near $1.1750 before sellers emerged.
  • Holding near $1.1715, on track for five weekly advances in the past six weeks if above that level.

Key Points:

  • Euro holds near recent highs, set for five weekly gains in six.
  • ECB policy steady, with easing cycle nearly complete.
  • Inflation forecasts revised upward for 2024 and 2025, trimmed for 2027.
  • Growth outlook improved for 2024 but downgraded for 2025.
  • France faces downgrade risk, Portugal supported by positive outlook.

Japan

Overview

The dollar reversed lower against the yen yesterday after briefly rising above JPY148.15, a three-day high, before sliding back to the JPY147 level in the North American session. That level coincides with the 61.8% retracement of the rally from Tuesday’s low near JPY146.30. Today, the dollar has rebounded, returning to the JPY148 area. Since the start of August, the dollar has consistently traded within a tight range, failing to settle below JPY146.90 or above JPY148.80.

Japan’s final July industrial production figures were also released, revising the initially reported 1.6% decline to -1.2%. This still offset more than half of the 2.1% gain seen in June. On average, industrial output has increased by 0.2% per month so far this year, compared with a 0.3% monthly decline in the same period last year. Looking ahead, August trade figures are expected next week, likely showing a deficit for the fifth time this year. The August CPI report will also be released, with Tokyo’s earlier data pointing to a slowdown in headline inflation to around 2.8% from 3.1%, marking the lowest reading since October last year. The Bank of Japan meets next week, though no policy action is anticipated. The swaps market currently prices about 15.5 bp of tightening this year, slightly higher than earlier this week but still below late August levels.

Economic Drivers

  • Industrial output for July revised to -1.2% from -1.6%, offsetting part of June’s 2.1% increase.
  • Average industrial output rose 0.2% per month in Jan–July 2025, compared with a 0.3% monthly decline in the same period last year.
  • August trade balance expected to remain in deficit for the fifth time this year.
  • August CPI expected to soften to 2.8% from 3.1%, lowest since October 2024.
  • BOJ meeting next week unlikely to deliver new policy measures.
  • Swaps market pricing 15.5 bp of tightening this year, up 3.5 bp on the week but still below late August levels.

Data and Events

  1. 12 September 2025: Revised Industrial Production

Price Action

  • Dollar briefly rose above JPY148.15 before retreating to JPY147.
  • Recovery today lifted the dollar back to the JPY148 area.
  • Dollar has remained between JPY146.90 and JPY148.80 since August 1.

Key Points:

  • Dollar-yen range remains capped between JPY146.90 and JPY148.80.
  • July industrial output revised smaller decline, showing modest recovery trend.
  • August trade balance likely to remain in deficit.
  • CPI expected to soften toward 2.8%, lowest since October 2024.
  • BOJ expected to remain on hold at upcoming meeting.

United Kingdom

Overview

Sterling posted an outside upside move yesterday after initially slipping to a three-day low near $1.3495. A broad dollar sell-off lifted the currency toward $1.3585, close to the highs seen in late July and mid-August around $1.3600. Despite the rebound, sterling has not managed to trade above $1.3600 since mid-July. Unless it closes above that threshold today, this will mark the fifth consecutive week the pound has settled with a $1.35 handle.

On the economic front, July data showed stagnation following a 0.4% expansion in June. Industrial production dropped 0.9% as expected, while services recorded a marginal 0.1% increase. Construction output surprised with a 0.2% rise, though the trade deficit widened unexpectedly. Weak growth adds to Chancellor Reeve’s fiscal challenges. Ahead of the Bank of England’s meeting on 18 September, upcoming labor market data and the August CPI release will be critical. The UK continues to hold the highest consumer inflation rate in the G10, at 3.8% in July. Markets expect no policy change from the BOE, with the swaps market pricing less than a 40% chance of a cut by year-end. Earlier this year, markets had implied a year-end rate near 3.50%, but expectations have since risen slightly above 3.87%.

Economic Drivers

  • UK economy stagnated in July after 0.4% growth in June.
  • Industrial production fell 0.9%, services gained 0.1%, and construction rose 0.2%.
  • Trade deficit unexpectedly widened, adding pressure on fiscal management.
  • UK consumer inflation remains highest in G10 at 3.8% in July.
  • Bank of England unlikely to adjust policy at its 18 September meeting.
  • Swaps market pricing less than 40% chance of a cut by year-end, with year-end rate expectations shifting from 3.50% in spring to above 3.87%.

Data and Events

  1. 12 September 2025: Construction Output
  2. 12 September 2025: Goods Trade Balance
  3. 12 September 2025: Industrial Production
  4. 12 September 2025: Manufacturing Production
  5. 12 September 2025: Consumer Inflation Expectations

Price Action

  • Sterling posted an outside upside day, recovering from $1.3495 to nearly $1.3585.
  • Key resistance remains around $1.3600, a level not breached since mid-July.
  • Sterling on track to close its fifth straight week with a $1.35 handle.

Key Points:

  • Sterling capped below $1.3600 despite broad dollar weakness.
  • UK economy stagnated in July with mixed sector performance.
  • Inflation remains the highest in the G10 at 3.8%.
  • BOE expected to keep policy steady at its upcoming meeting.
  • Market pricing shows limited expectations for a cut before year-end.

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