15/09/2025 Market Watch
The Dollar Awaits the Fed’s Next Move
Key Takeaways:
- US dollar begins the week weaker against all G10 currencies, with sterling leading.
- Mexican peso hits a new yearly high as USD slides toward MXN18.40.
- FOMC meeting starts tomorrow, expected to deliver a 25 bp rate cut.
- Global equities mostly higher, though Taiwan and Australia lagged.
- European bonds firmer, with Italy seeing strong demand, but France underperforms after downgrade.
- 10-year Treasury yield steady near 4.06%.
- Gold consolidating near record highs, crude oil trading in tighter range.
The US dollar is starting the week on the defensive, with losses against all major currencies. Sterling leads the advance, pushing toward $1.36, a level that has capped gains in recent months. Emerging market currencies are also firmer, with the Mexican peso notching a new high for the year as the greenback moves closer to MXN18.40. This comes as markets prepare for the Federal Reserve’s two-day policy meeting, where a 25 bp rate cut is widely anticipated. The announcement follows heightened speculation around Fed independence, with an appeals court ruling on the firing of Governor Cook potentially due today.
Equity markets are generally stronger. European indices are higher, with the Stoxx 600 erasing Friday’s dip, while US futures are narrowly mixed. In Asia, Taiwan and Australia underperformed. Bond markets show mild bullishness, with European yields mostly 2-3 bp lower. Spain and Portugal are benefitting from recent rating upgrades, while Italy’s yields also fell sharply. France lags after a Fitch downgrade, reflecting continued divergence in eurozone sovereign risk perception.
In the US, the 10-year Treasury yield is steady at 4.06% after dipping below 4% last week. Commodities remain in consolidation mode. Gold is holding firm just under $3675 after setting a new record high, while October WTI crude is trading calmly between $62.50 and $63.25 after wide swings before the weekend. Together, these moves show markets are in a holding pattern, waiting for the Fed’s decision to set the tone for the weeks ahead.
United States of America
Overview
The Dollar Index is trading in a narrow band above 97.50, holding largely within the range established on 5 September following the release of August employment data. The index has been confined between approximately 97.45 and 98.25, reflecting subdued momentum. Since Chair Powell’s speech at Jackson Hole on 22 August, the index has trended lower within a descending channel, currently defined by 97.15 on the lower side and 98.45 on the upper side, gradually narrowing by around 10 ticks each week.
This week begins quietly but will intensify with key economic releases and the Federal Reserve’s policy meeting. Today’s focus is on the September New York State manufacturing survey, with retail sales and industrial output figures due tomorrow. Market attention will peak on Wednesday with the FOMC decision, where expectations are for a rate cut. In the political sphere, a federal appeals court ruling may come today regarding President Trump’s attempt to overturn the decision preventing him from dismissing Federal Reserve Governor Cook. Meanwhile, money markets are under pressure due to personal and corporate tax deadlines coinciding with the settlement of last week’s Treasury auctions.
Economic Drivers
- Dollar Index remains within a defined range, reflecting constrained trading conditions.
- Broader downtrend channel persists since Powell’s Jackson Hole speech.
- Anticipation of FOMC decision shaping near-term sentiment.
- Political uncertainty surrounding the status of Federal Reserve governance.
- Money market strains from tax deadlines and auction settlements.
Data and Events
- 15 September 2025: Empire State Manufacturing Index
Price Action
- Dollar Index holding above 97.50, contained within 97.45–98.25.
- Broader down channel in place since August 22, now framed by 97.15–98.45.
- Gradual compression of the trading range by roughly 10 ticks per week.
Key Points:
- Dollar Index trading remains confined to a narrow range.
- Markets anticipate key US data and the FOMC policy decision this week.
- Political developments surrounding Fed governance add uncertainty.
- Money market pressures emerge from tax deadlines and Treasury settlements.
Canada
Overview
The Canadian dollar has struggled in September, falling in eight of the past ten sessions against the US dollar. With a loss of about 0.75% in the first two weeks of the month, it stands as the weakest performer among the G10 currencies. The greenback is consolidating above CAD1.3825, a level that coincides with the 20-day moving average, after failing to see sustained selling pressure following last week’s technical reversal.
Domestically, Prime Minister Carney announced the creation of a new housing agency over the weekend, backed by C$13 billion in funding to address affordability concerns. While today’s releases on housing, manufacturing, and wholesale sales are not typically market-moving, attention is shifting to tomorrow’s August CPI figures and the Bank of Canada’s policy decision on Wednesday. Markets expect the central bank to lower its overnight rate target to 2.50% from 2.75%, just hours before the US Federal Reserve delivers its own decision.
Economic Drivers
- Persistent Canadian dollar weakness, marking the worst G10 performance in early September.
- Limited impact from today’s housing, manufacturing, and wholesale sales reports.
- Government initiative to address housing affordability through a C$13 billion agency.
- Market anticipation of the Bank of Canada rate cut, coinciding with the US Federal Reserve meeting.
Data and Events
- 15 September 2025: Manufacturing Sales
- 15 September 2025: Wholesale Sales
Price Action
- Canadian dollar has fallen in eight of the past ten sessions.
- Down about 0.75% in the first two weeks of September.
- US dollar consolidating above CAD1.3825, aligned with the 20-day moving average.
Key Points:
- Canadian dollar is the weakest G10 performer in September so far.
- Market focus on August CPI and the Bank of Canada’s policy meeting.
- Government launches a C$13 billion housing agency to tackle affordability.
- US dollar remains steady above CAD1.3825 despite recent reversal signals.
China
Overview
The dollar has steadily weakened against the offshore yuan over recent months. From early May to late July, the greenback fell by about 1.5%, followed by a decline of just under 1.0% since the start of August. Last Thursday, it touched its lowest level of the year near CNH7.1120. The People’s Bank of China (PBOC) has been influencing the exchange rate through its daily reference rate, which was slightly raised today to CNY7.1056 after being set at CNY7.1019 before the weekend.
China released a series of August economic data today, pointing to continued weakness. Housing prices, both new and used, fell further. Retail sales and industrial production growth slowed on a year-to-date, year-over-year basis. Property market investment and residential sales remain under pressure, with fixed asset investment slipping to 0.5%, the lowest since the pandemic. This weakness aligns with the government’s campaign to curb excessive investment.
On the geopolitical front, while US and Chinese officials continue negotiations, Beijing has intensified scrutiny of the American semiconductor sector. Authorities launched two investigations into US chips and issued a preliminary conclusion that Nvidia violated antitrust law in its 2020 acquisition of Mellanox Technologies.
Economic Drivers
- Persistent yuan strength against the dollar, guided by PBOC policy adjustments.
- Declining housing prices across both new and existing property markets.
- Weak retail sales and industrial production growth.
- Property sector investment slowdown, with fixed asset investment at its weakest since the pandemic.
- Rising trade and technology tensions with the US, with Beijing targeting the semiconductor sector.
Data and Events
- 15 September 2025: New Home Prices
- 15 September 2025: Industrial Production
- 15 September 2025: Retail Sales
- 15 September 2025: Unemployment Rate
Price Action
- Dollar fell by around 1.5% against the offshore yuan between May and July.
- Down nearly 1.0% since 1 August.
- Year’s low recorded last Thursday near CNH7.1120.
- PBOC reference rate raised to CNY7.1056 from CNY7.1019 before the weekend.
Key Points:
- Yuan remains firm against the dollar, supported by PBOC policy guidance.
- August data highlight continued economic softness in housing, consumption, and investment.
- Fixed asset investment growth at 0.5% is the weakest since the pandemic.
- US-China tensions escalate with Beijing targeting the American semiconductor sector.
Europe
Overview
The euro is holding firm within a narrow range, testing the highs seen last Thursday and Friday just below $1.1750. Since 5 September, when US jobs data were released, the common currency has been largely confined between $1.1650 and $1.1760. Implied volatility remains subdued, with three-month measures below 7% and one-month measures near 6.5%, reflecting market calm ahead of potentially larger moves.
Recent rating actions in the region have had little immediate impact. Fitch downgraded France to A+ from AA-, while Portugal’s rating was lifted to A from A-. S&P also raised Spain’s rating to A+. Despite these changes, market reaction has been muted. On the trade front, the eurozone recorded a seasonally adjusted surplus of 5.3 billion euros in July, higher than June’s 3.7 billion but still less than half the median forecast. For the first half of 2025, the trade surplus was about 8.5% lower than the same period in 2024.
Looking ahead, tomorrow’s German ZEW survey is the next notable release, though the broader euro area remains out of focus after last week’s ECB meeting. Market attention is instead shifting toward several upcoming G10 central bank decisions. The US-German two-year yield spread continues to draw attention, narrowing to 155 basis points, the smallest US premium since September last year. This represents a decline of just over 25 basis points since Chair Powell’s Jackson Hole remarks on 22 August.
Economic Drivers
- Stable euro range following US jobs data and ECB policy meeting.
- Subdued implied volatility ahead of upcoming central bank decisions.
- Mixed sovereign credit rating actions: downgrade of France, upgrades for Portugal and Spain.
- Eurozone trade surplus weaker compared with forecasts and down 8.5% year-over-year in the first half of 2025.
- Narrowing US-German two-year yield spread, smallest premium since September 2024.
Data and Events
- 15 September 2025: Trade Balance
Price Action
- Euro trading between $1.1650 and $1.1760 since 5 September.
- Testing resistance just below $1.1750.
- Implied volatility remains low: below 7% for three months, near 6.5% for one month.
- US-German two-year rate differential at 155 bp, lowest this year.
Key Points:
- Euro steady within a tight range, volatility subdued.
- Recent rating actions across France, Portugal, and Spain had limited market effect.
- Eurozone trade surplus weaker than expected, down compared with last year.
- US-German two-year yield spread narrowed to the smallest gap since September 2024.
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