20/09/2025 Week Ahead

Dollar Correction Regains Ground

Key Takeaways:

  • Dollar fell early last week after the Fed rate cut, then rebounded on higher yields.
  • Powell and SEP sounded less dovish than expected, limiting downside.
  • Near-term US dollar gains look corrective, not structural.
  • Focus shifts to Fed speakers, with 14 scheduled including Powell on 23/09.
  • US data takes a back seat, while Europe’s PMI will be more impactful.
  • BOJ hawkish dissents pushed hike odds to 72%, supported by Tokyo CPI rise.

The US dollar opened last week under pressure, with new yearly lows against sterling and other G10 currencies following the FOMC’s decision to cut rates. However, the subsequent press conference by Chair Powell and the Fed’s Summary of Economic Projections signaled a less dovish stance than implied by the rate move alone. This contrast, along with renewed concerns over labor market softness, helped lift US yields and fueled a dollar rebound into the weekend. The recent gains should be viewed as corrective rather than the beginning of a lasting uptrend.

With inflation largely anticipated through CPI and PPI releases, the upcoming PCE deflator is unlikely to be the primary driver. Instead, markets will look closely at communication from the Fed, with 14 officials scheduled to speak across the week. Chair Powell’s remarks on Tuesday, 23 September, will draw the most attention as markets gauge the balance between growth concerns and inflation vigilance.

Across the Atlantic, preliminary September PMI data will be more decisive for Europe than for the US, Japan, or Australia. The bar for another ECB cut remains high, though growth indicators will be monitored closely. In Japan, the Bank of Japan’s decision to hold policy was marked by two hawkish dissents, prompting markets to raise the probability of a 2024 rate hike to 72%, the highest since late August. A modest uptick in Tokyo’s CPI, the first in four months, has reinforced expectations that policy tightening remains on the table.

United States of America

Overview

The US dollar remains closely tied to shifts in interest rate expectations. Markets are fully pricing in a rate cut next month, with around a 75% probability of another cut in December. However, the outlook for further easing may be overstretched until fresh labor market data arrives on 3 October. As seen often, market reactions differed between the FOMC statement and Chair Powell’s press conference, underlining the uncertainty in interpreting Fed policy signals.

In the coming week, communication from policymakers will dominate, with nearly three-quarters of Fed governors and regional presidents scheduled to speak. Chair Powell’s remarks on Tuesday will be pivotal, but the wide dispersion of views across the Committee means markets should prepare for mixed signals.

Beyond speeches, a heavy flow of economic data is expected. Thursday and Friday stand out, with trade and personal income reports offering crucial insights into the health of US consumption. Income growth has remained steady at 0.4% monthly over the past 18 months, while consumption has slowed notably, stagnating in H1 2025 compared with modest gains in 2024. If employment figures have indeed been overstated, this would likely imply weaker income trends ahead, which could weigh further on household spending.

Economic Drivers

  • Dollar driven primarily by changes in US interest rate expectations.
  • Market has fully priced in a rate cut for next month and a 75% chance of another in December.
  • Risk of overstretched expectations until new labor market data.
  • Wide dispersion of Fed views may create policy uncertainty.
  • Chair Powell’s speech will be closely watched.

Data and Events

  1. 23 September 2025: FOMC Members Speak
  2. 23 September 2025: Current Account
  3. 23 September 2025: Flash Manufacturing & Services PMI
  4. 24 September 2025: Fed Chair Powell Speaks
  5. 24 September 2025: New Home Sales
  6. 25 September 2025: Final GDP
  7. 25 September 2025: Unemployment Claims
  8. 25 September 2025: Durable Goods
  9. 25 September 2025: Existing Home Sales
  10. 26 September 2025: Core PCE Price Index

Price Action

  • Dollar Index posted a modest weekly gain after two weeks of decline.
  • Resistance seen at 97.90–98.00, with a break above 98.25 opening scope for 98.70.
  • Momentum indicators signal potential for further gains.
  • Support lies near 97.00, with a break below undermining the constructive outlook.

Key Points:

  • US dollar remains highly sensitive to Fed policy expectations.
  • Markets have likely moved too far on rate cut pricing.
  • Fed speakers, especially Powell, will shape sentiment this week.
  • US data flow highlights consumer and trade dynamics.
  • Dollar Index technicals point to near-term upside unless support fails.

Australia

Overview

The Australian dollar has shown divergence from the Canadian dollar this month, yet their 30-day correlation remains firm near 0.70, the lowest in almost two months. At the same time, the inverse correlation between the Australian dollar and the US dollar against the offshore yuan has eased from -0.80 in early August to around -0.40, indicating shifting dynamics in cross-currency relationships.

On the domestic front, economic indicators have pointed to a stronger backdrop. The composite PMI has surged from 50.5 in May, the year’s low, to 55.5 in August, the highest level in at least three years. New orders have also reached their strongest point in the same period, signaling momentum in activity. Meanwhile, inflation pressures have resurfaced, with CPI jumping to 2.8% in July from 1.9%, the highest level since last July. This rebound has cooled more aggressive expectations for monetary easing, with futures markets pricing the year-end cash rate near 3.30%, the highest in nearly four months.

Economic Drivers

  • Australian and Canadian dollars diverging but still holding a 30-day correlation near 0.70.
  • Inverse correlation with the US dollar against the offshore yuan softened from -0.80 to -0.40 since August.
  • Composite PMI at 55.5 in August, highest in at least three years, supported by record-high new orders.
  • CPI rose to 2.8% in July, reversing earlier declines in May and June.
  • Market expectations for policy easing have moderated, with year-end rate pricing near 3.30%.

Data and Events

  1. 22 September 2025: RBA Gov Bullock Speaks
  2. 23 September 2025: Flash Manufacturing & Services PMI
  3. 24 September 2025: CPI

Price Action

  • Australian dollar staged a key reversal on 17/09, reaching a new yearly high above $0.6705 before reversing lower.
  • Follow-through selling drove it to $0.6585 ahead of the weekend.
  • Decline overshot the 50% retracement of the rally from the 02/09 low near $0.6485.
  • Next support targets lie at $0.6560–0.6575, followed by $0.6500–0.6525.
  • Momentum indicators turning lower reinforce the corrective outlook.

Key Points:

  • Domestic data show strong PMI growth and a rebound in inflation.
  • Futures markets scaled back expectations for aggressive monetary easing.
  • Currency correlations highlight shifting dynamics with both CAD and CNY.
  • Australian dollar technicals point to near-term corrective weakness.
  • CPI release this week will guide market expectations further.

Canada

Overview

The Canadian dollar has been influenced both by the general direction of the US dollar and its own independent weakness. The greenback reached its low against the Canadian dollar on 16 June, ahead of similar moves in the Dollar Index, the euro, and sterling. Over the past three months, the Canadian dollar has been the weakest performer among G10 currencies, declining about 1.2%. However, in a reversal ahead of the weekend, it emerged as the best-performing G10 currency, gaining roughly 0.50% even as the US dollar broadly strengthened.

Economic conditions remain fragile, with Canada’s economy showing consistent weakness through the second quarter. Monthly GDP contracted in every month of Q2, with quarterly growth falling at a 1.6% annualized pace. This backdrop helps explain the Bank of Canada’s decision to cut rates last week. Markets are now weighing the outlook for further easing, with swaps pricing a 55% chance of another cut at the October meeting and an 88% probability of an additional move in December.

Economic Drivers

  • Canadian dollar driven by overall US dollar direction but showing independent weakness.
  • Weaker performance than all other G10 currencies over the past three months.
  • Gained 0.50% last week, outperforming peers despite broad US dollar strength.
  • Economy contracted 1.6% annualized in Q2, with GDP declining each month.
  • Bank of Canada cut rates last week due to weak growth.
  • Market pricing 55% chance of another cut in October and 88% chance in December.

Data and Events

  1. 26 September 2025: GDP

Price Action

  • Canadian dollar reversed initial weakness last week, rebounding into the weekend.
  • US dollar briefly rose to CAD1.3825, hitting the 61.8% retracement of the decline from the 11/09 high near CAD1.3890.
  • Reversed lower to CAD1.3765, close to Thursday’s low.
  • A break below CAD1.3765 could open a move toward CAD1.3725.

Key Points:

  • Canadian dollar was the weakest G10 currency in recent months but recovered strongly last week.
  • Domestic economy contracted through Q2, prompting a BoC rate cut.
  • Markets expect a high probability of further easing this year.
  • July GDP release will be critical in shaping expectations.
  • Technicals point to key support around CAD1.3725 with risk toward CAD1.3540.

China

Overview

The People’s Bank of China has continued to allow the yuan to strengthen gradually against the US dollar. While the reasoning remains speculative, some suggest it could be a gesture to ease conditions ahead of a potential Trump-Xi summit later this year. Such an interpretation implies China is operating from a weaker position, yet the evidence shows otherwise. Despite tariffs, China has managed to replace lost US demand, diversify trade flows, and strengthen strategic supply chains.

Tensions around technology remain central. The US has long been wary of China’s pursuit of advanced American chip technology. Now, Washington is frustrated with Beijing’s discouragement of purchases of new Nvidia chips. At the same time, China has cut its imports of US energy and soy while finding workarounds to primary and secondary export controls. Control over rare earth supplies further underscores its leverage. Meanwhile, the US administration appears intent on avoiding confrontation. A Taiwanese arms request has been denied, and Treasury Secretary Bessent explicitly welcomed the yuan’s appreciation of about 2.5% this year, framing it as more problematic for Europe than for the US.

Economic Drivers

  • PBOC guiding yuan appreciation against the dollar.
  • Market speculation of a concession ahead of a potential Trump-Xi summit.
  • China has replaced lost US demand despite tariffs.
  • US frustration with Beijing’s restrictions on Nvidia chip purchases.
  • Sharp reduction in Chinese imports of US energy and soy.
  • Beijing has found workarounds to US export controls.
  • Rare earth supply dominance reinforces China’s strategic leverage.
  • US administration currently avoiding actions that could antagonize China.

Data and Events

  1. 22 September 2025: 1-y & 5-y Loan Prime Rate
  2. 22 September 2025: Foreign Direct Investment
  3. 25 September 2025: CB Leading Index

Price Action

  • Dollar hit year-to-date low against offshore yuan near CNH7.1850 last week.
  • Rebounded to around CNH7.12 into the weekend as the dollar broadly corrected higher.
  • Break above CNH7.1270 could open the way toward CNH7.15.

Key Points:

  • Yuan strength reflects both PBOC policy and shifting geopolitical context.
  • China continues to offset tariffs by diversifying demand and supply chains.
  • Technology and trade tensions remain central to US-China relations.
  • Loan prime rates expected to remain unchanged this week.
  • Offshore yuan holding gains, with CNH7.1270 as near-term resistance.

Europe

Overview

The euro’s trajectory continues to be shaped primarily by US developments, with geopolitical tensions and domestic politics having limited influence. Neither the appointment of France’s fifth prime minister in two years nor NATO’s interception of Russian drones over Poland prevented the euro from reaching multi-year highs last week. While Putin and Trump described the drone incursion as an “innocent” error, Warsaw rejected this explanation, and air defenses from Britain and France were deployed to support Poland. Estonia also reported a violation of its airspace before the weekend.

Markets remain heavily influenced by Federal Reserve expectations. Nearly 50 basis points of Fed cuts are priced in for Q4, a key factor behind euro strength. However, this repricing may now require a new catalyst to push sentiment further. The US two-year yield premium over Germany, which has narrowed by 50 basis points since late July to about 150 basis points, appears to have found a short-term floor. Corrective pressures in the dollar could also limit further euro gains.

Economic Drivers

  • Euro strength driven by Fed rate cut expectations rather than European developments.
  • Market pricing nearly 50 bp of Fed cuts in Q4.
  • Narrowing of US two-year yield premium over Germany to 150 bp, lowest since July.
  • French political instability with the fifth prime minister in two years.
  • Escalation of regional tensions after Russian drones entered Polish and Estonian airspace, with NATO responding.
  • ECB signaling a high bar for further rate cuts, reducing the influence of upcoming data.

Data and Events

  1. 22 September 2025: Consumer Confidence
  2. 23 September 2025: Flash Manufacturing & Services PMI
  3. 24 September 2025: German ifo Business Climate

Price Action

  • Euro set a new four-year high near $1.1920 during the Fed press conference.
  • Reversed lower, falling to around $1.1730 into the weekend.
  • A break below $1.1720–1.1725 could signal a move toward $1.1650–1.1660.
  • Momentum indicators suggest further downside risk.

Key Points:

  • Euro’s recent gains were driven largely by Fed expectations, not European factors.
  • Narrowing US-German yield spread has supported euro strength.
  • Political instability in France and security concerns in Eastern Europe had little immediate impact.
  • Preliminary PMI and lending data are unlikely to shift ECB policy outlook.
  • Technicals point to corrective downside after the recent highs.

Japan

Overview

The yen remains primarily driven by US interest rate movements rather than domestic rate differentials. This dynamic continues to overshadow local developments, though two key events are in focus for early October. On 3 October, the US September employment report will be released, followed by Japan’s LDP leadership election on 4 October. Both have the potential to influence sentiment toward the yen.

Domestically, activity indicators show modest improvement. The composite PMI has risen for three straight months through August, reaching 52.0, its highest level since last August. However, inflation remains the critical measure for policy outlook. Tokyo’s CPI, due at the end of this week, is closely watched as it provides an early signal of national trends. Both the headline and core measures have declined for three consecutive months, falling to 2.6% and 2.5% respectively in August. Expectations are for a slight uptick in September. Meanwhile, speculation over a possible rate hike later this year has intensified after two BOJ members dissented at last week’s decision to hold rates steady.

Economic Drivers

  • Yen movements remain more sensitive to US interest rate changes than to domestic factors.
  • Composite PMI rose to 52.0 in August, matching the highest level since last year.
  • Tokyo CPI has declined for three months but is expected to edge higher in September.
  • Two hawkish dissents at the BOJ meeting have boosted speculation of a Q4 rate hike.

Data and Events

  1. 24 September 2025: Flash Manufacturing PMI
  2. 24 September 2025: BOJ Core CPI
  3. 25 September 2025: Monetary Policy Meeting Minutes
  4. 26 September 2025: Tokyo Core CPI

Price Action

  • Dollar dropped to JPY145.50 after the FOMC, a two-month low and near the 50% retracement of the April–September rally.
  • Recovery stalled in the JPY148.25–148.30 zone, aligned with the downtrend from recent highs.
  • Next technical target is JPY148.65–148.85, dependent on continued US rate gains.

Key Points:

  • Yen’s path continues to mirror US interest rate developments.
  • Tokyo CPI will be critical for inflation trends and BOJ policy expectations.
  • PMI momentum supports moderate domestic activity.
  • Speculation of a Q4 BOJ hike remains after hawkish dissents.
  • Dollar-yen technicals show key resistance near JPY148.65–148.85.

United Kingdom

Overview

Sterling’s movements continue to be dominated by the broader direction of the US dollar, particularly against the euro. Domestic factors do play a role, though the relationship differs from that of the US. In the UK, higher long-term yields on 10- and 30-year gilts are inversely correlated with sterling, meaning rising yields tend to weigh on the currency.

Economic developments remain mixed. The preliminary September PMI will be the main domestic highlight this week. The composite PMI rose to 53.5 in August, the strongest reading since last August, pointing to some resilience in business activity. On the other hand, last week’s larger-than-expected budget deficit reinforced fiscal concerns that are likely to intensify in the run-up to Chancellor Reeves’ Autumn Budget due in late November.

Economic Drivers

  • Sterling direction influenced primarily by the US dollar, particularly against the euro.
  • Domestic sensitivity to long-term UK yields, with higher 10- and 30-year rates weighing on sterling.
  • Composite PMI rose to 53.5 in August, the highest in over a year.
  • Concerns about fiscal position highlighted by a wider-than-expected budget deficit.
  • Focus building toward the Autumn Budget announcement in late November.

Data and Events

  1. 23 September 2025: BOE Gov Bailey Speaks
  2. 23 September 2025: Flash Manufacturing & Services PMI

Price Action

  • Sterling rally from 03/09 low near $1.3335 peaked last week at $1.3725 after the FOMC.
  • Reversed lower to just under $1.3465 before the weekend.
  • Momentum indicators are turning lower, suggesting more downside.
  • Immediate support near $1.3430–1.3435, with a break targeting $1.3335–1.3365.

Key Points:

  • Sterling largely mirrors US dollar trends but reacts inversely to UK long-term yields.
  • PMI data remains a positive spot, with the highest reading in over a year.
  • Fiscal deficit concerns are resurfacing ahead of the Autumn Budget.
  • Technical signals point to additional near-term sterling weakness.
  • Key support levels sit near $1.3430 and then $1.3335.

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