16/09/2025 Market Watch

Mixed Global Market Signals as Dollar Retreats

Key Takeaways:

  • US dollar weaker against most G10 and emerging market currencies.
  • Central European currencies firm despite regional tensions.
  • Chinese yuan at new yearly high.
  • S&P 500 and Nasdaq set record highs, boosting Asia Pacific equities.
  • European equities lower, US futures firmer.
  • Yields mixed across regions, US 10-year steady near 4.04%.
  • Gold reached a new high, oil trading quietly near $63.

The US dollar is trading with a softer tone across the G10 space and against most emerging market currencies. Yesterday’s losses have carried over into today’s session, leaving the greenback on the defensive. Central European currencies, including the zloty, remain firm despite geopolitical strains. Britain and France have deployed aircraft to help protect Polish airspace following more drone incursions, while Warsaw rejected China’s request to reopen the Belarus border, a key trade corridor for Chinese goods into Europe. Meanwhile, the Chinese yuan has climbed to a new high for the year, reinforcing Asia’s position in currency strength.

Equity markets are showing a mixed global picture. The S&P 500 and Nasdaq extended gains to fresh record highs, lifting sentiment across Asia Pacific bourses, with Taiwan leading major markets with a rise of more than 1%. Hong Kong and China’s CSI 300 lagged behind, failing to join the rally. In Europe, equities are broadly weaker, with the Stoxx 600 giving back part of yesterday’s advance, and central European indices also trending lower. US index futures, however, are holding firmer.

Bond markets reflect the divide in investor sentiment. European benchmark 10-year yields are modestly higher, while UK Gilts edged up following the release of labor market data. In contrast, the US 10-year Treasury yield remains stable near 4.04%. Commodities are showing selective moves, with gold pushing to a new high near $3698 after a bullish performance yesterday. Oil remains quiet, with October WTI trading inside recent ranges around the $63 level.

United States of America

Overview

The Dollar Index has weakened further, posting its lowest settlement since late July and moving below 97.00 in European trading. This break points toward a potential test of the multi-year low recorded on 1 July, just under 96.40. The market focus now turns to the two-day FOMC meeting, where officials including Miran and Cook are expected to attend.

US data remains mixed. Retail sales appear resilient despite a sharp slowdown in vehicle sales, with core retail sales expected to register steady growth. Import prices likely declined again, reflecting lower oil costs, although non-petroleum imports are holding broadly stable. Export prices are forecast to ease slightly, offsetting the previous month’s gain. Industrial production looks soft, weighed down by manufacturing weakness, and could register a second consecutive monthly drop, marking the first back-to-back contraction this year.

Growth expectations remain divided. The Atlanta Fed’s GDP tracker holds at 3.1% for the current quarter, while the median forecast in Bloomberg’s survey projects growth at about half that pace. This divergence underscores ongoing uncertainty around the US growth outlook as monetary policy deliberations continue.

Economic Drivers

  • Dollar Index under pressure, testing multi-year lows.
  • Anticipation of FOMC meeting outcomes with Miran and Cook in attendance.
  • Resilient retail sales despite weaker vehicle sales.
  • Import prices dragged down by oil, while non-petroleum imports stable.
  • Export prices likely easing, offsetting prior gains.
  • Industrial production weakening, led by manufacturing slowdown.
  • Conflicting GDP growth estimates highlighting uncertainty.

Data and Events

  1. 16 September 2025: Retail Sales

Price Action

  • Dollar Index broke below 97.00, pointing to a test of the 96.40 area.
  • Technical weakness consistent with recent downward momentum.

Key Points:

  • Dollar Index broke below 97.00, nearing multi-year lows.
  • Retail sales remain firm despite weak vehicle sales.
  • Import and export prices soft, reflecting oil-driven dynamics.
  • Industrial production weakening for a second month.
  • Growth forecasts diverge sharply, underscoring policy uncertainty.

Canada

Overview

The US dollar has retreated to its weakest level in six days against the Canadian dollar, slipping slightly below CAD1.3770 yesterday and extending to near CAD1.3760 today. The market is eyeing support levels around CAD1.3740 and the late August low near CAD1.3725.

Attention turns to domestic data and policy developments. Canada releases its August CPI today, which is expected to show only a modest 0.1% monthly increase. Due to base effects, the annual headline rate could rise to 2.0% from 1.7%. Underlying core inflation is anticipated to remain steady in the 3.0%-3.1% range. However, inflation is not the primary driver of market expectations. Instead, the focus is on the broader economic performance and outlook, which has led swaps pricing to strongly favour a Bank of Canada rate cut this week, aligning with expectations for easing in the United States.

The yield curve further highlights these concerns. Canada’s 2-10-year curve is inverted by around 67 basis points, sitting at the lower end of its three-month range. The US curve, similarly inverted at about 50 basis points, is near the lower end of its own six-week range. This reinforces market caution over growth prospects despite stable inflation readings.

Economic Drivers

  • US dollar weaker against the Canadian dollar, testing recent lows.
  • August CPI expected to rise 0.1%, annual rate seen ticking up to 2.0%.
  • Core inflation measures stable at around 3.0%-3.1%.
  • Market expectations for a Bank of Canada rate cut driven by weak economic performance, not inflation.
  • Inverted yield curve reflects investor concerns over growth outlook.

Data and Events

  1. 16 September 2025: Housing Starts
  2. 16 September 2025: CPI

Price Action

  • USD/CAD fell to CAD1.3760, near six-day low.
  • Key support levels seen at CAD1.3740 and late August low near CAD1.3725.

Key Points:

  • Canadian dollar firm as USD/CAD moves toward key support levels.
  • CPI expected to rise modestly, with headline rate ticking up to 2.0%.
  • Core inflation remains steady around 3.0%-3.1%.
  • Market strongly positioned for a Bank of Canada rate cut.
  • Yield curve inversion highlights ongoing growth concerns.

Europe

Overview

The euro advanced above $1.18 for the first time in two months, supported by a broadly weaker US dollar and narrowing yield spreads. It is now positioned to test the multi-year high set on 1 July near $1.1830. Market attention is also drawn to the expiry of 1.6 billion euros in options at the $1.18 strike, which adds to short-term positioning pressures.

The currency’s strength comes despite Fitch’s downgrade of France, which has had little immediate market impact. A key factor is the continued narrowing of the US two-year premium over Germany, which has fallen by around 30 basis points since Fed Chair Powell’s speech at Jackson Hole. At approximately 151 basis points, the spread is at its lowest level since last September.

Economic data has provided a mixed backdrop. Eurozone industrial production rose by 0.3% in the latest reading, offsetting part of June’s revised 0.6% decline. However, the quarterly picture shows weakness, with a 0.7% average monthly contraction in Q2 following a 1.3% expansion in Q1, which was likely boosted by front-loading activity to avoid US tariffs. Meanwhile, sentiment data from Germany highlights the divergence in views: the ZEW survey showed that assessments of current economic conditions worsened for the second straight month, reaching the lowest level since May, while expectations improved modestly after a sharp drop in August.

Economic Drivers

  • Broad US dollar weakness underpinning euro gains.
  • Narrowing US-Germany two-year yield spread, now at its lowest in nearly a year.
  • Limited fallout from Fitch’s downgrade of France.
  • Eurozone industrial production rose 0.3% after a sharp decline in June, though quarterly trend remains weak.
  • German ZEW survey showed current conditions deteriorating but expectations recovering slightly.

Data and Events

  1. 16 September 2025: ECB President Lagarde Speaks
  2. 16 September 2025: German ZEW Economic Sentiment
  3. 16 September 2025: Industrial Production

Price Action

  • Euro traded above $1.18 for the first time in two months.
  • Options worth 1.6 billion euros expiring at $1.18 influencing positioning.
  • Euro poised to test the July 1 high near $1.1830.

Key Points:

  • Euro rose above $1.18, eyeing July’s multi-year high at $1.1830.
  • Limited market reaction to Fitch’s downgrade of France.
  • US-Germany yield spread at lowest since September 2023.
  • Eurozone industrial production showed modest recovery but quarterly weakness persists.
  • German sentiment split between deteriorating current conditions and improved expectations.

United Kingdom

Overview

Sterling has broken above $1.3600 for the first time since 10 July, closing just shy of that level yesterday and extending gains to nearly $1.3650 today. Market momentum is now targeting $1.3680, with the multi-year high of $1.3790 from 1 July as a broader objective.

The week is packed with UK economic data releases alongside the Bank of England policy meeting on Thursday. Labour market figures show some resilience but also signs of weakness. Average weekly earnings rose firmly at 4.7% year-over-year in July compared to 4.6% in June, though excluding bonuses the pace eased slightly to 4.8% from 5.0%. Unemployment held steady at 4.7%. However, the number of payrolled employees fell for a seventh consecutive month, slipping by 8,000, though this was less severe than the average monthly decline of 17,500 over the prior six months.

Attention now shifts to inflation data. August CPI is expected to increase by 0.3%, which due to base effects should leave the annual rate unchanged at 3.8%, one of the highest among G10 economies. Core inflation is projected to soften to 3.6% while services inflation is expected to ease to 3.8%. Markets are pricing minimal chance of a rate cut this week, but around a 33% probability of a cut later this year. Meanwhile, the Bank of England faces pressure to slow the pace of its outright Gilt sales at this meeting.

Economic Drivers

  • Sterling supported by broad gains and approaching key resistance levels.
  • The labour market is showing mixed signals, with stronger wage growth but continued declines in payrolled employment.
  • CPI expected to hold steady at 3.8% year-over-year, with moderation in core and services inflation.
  • Market pricing a limited chance of policy easing this year, no immediate move expected.
  • Pressure on the BOE to reduce Gilt sales.

Data and Events

  1. 16 September 2025: Average Earnings Index
  2. 16 September 2025: Claimant Count Change
  3. 16 September 2025: Unemployment Rate

Price Action

  • Sterling climbed to nearly $1.3650 after breaking above $1.3600.
  • Next upside target around $1.3680, with July’s multi-year high near $1.3790 as a broader resistance level.

Key Points:

  • Sterling advanced above $1.3600, eyeing further upside.
  • Labour market data mixed, with strong wages but falling payrolled employment.
  • Inflation expected to hold steady at 3.8%, with core and services easing.
  • Market assigns no immediate BOE cut, but some chance later this year.
  • BOE under scrutiny for its Gilt sales programme.

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