06/09/2025 Week Ahead

Central Bank Steady, Politics in Focus

Key Takeaways:

  • Poor US jobs data fuels speculation of a 50 bp Fed rate cut, but risks appear overstated.
  • Headline CPI release could temper expectations of aggressive easing.
  • ECB expected to keep policy steady, but French political risks dominate.
  • Fitch may downgrade France as deficit reduction hopes fade.
  • Japan’s political uncertainty and weak household spending weigh on BOJ outlook.
  • Odds of a BOJ hike this year fall below 50%.

The disappointing US employment figures have intensified speculation that the Federal Reserve could deliver a 50 bp rate cut when it meets on September 17. However, this expectation may be overblown. Additional labor market weakness is expected with the Bureau of Labor Statistics’ annual benchmark revisions, which could cut up to 1 million jobs from the official count. Last year’s adjustment was 818k lower. Yet, the September 11 release of headline CPI, if showing renewed inflationary pressures, could curb enthusiasm for a large move.

In Europe, the ECB will announce its policy decision on Thursday. The central bank is widely expected to leave interest rates unchanged, but political developments in France may overshadow the event. The French government faces a likely defeat in a confidence vote on Monday. Should President Macron appoint a new prime minister, his fiscal consolidation plans will stall. France’s deficit is projected at 5.4% this year, with a target of only 4.6% by 2026. This failure to deliver fiscal improvement raises the risk of a credit downgrade by Fitch later in the week, given that France already holds a negative outlook on its AA- rating.

Japan enters the week with political uncertainty as the ruling LDP votes on whether to hold a leadership contest. Senior officials have resigned after recent electoral losses, but the spotlight remains on Prime Minister Ishiba’s leadership. Economic indicators add to the challenge. Despite firm wage growth, household spending has underperformed, and doubts linger about the effectiveness of government stimulus. As a result, the probability of a Bank of Japan rate hike this year has slipped below 50% for the first time in two months.

United States of America

Overview

The outlook for the US dollar is dominated by expectations of a Federal Reserve rate cut and the political environment surrounding the central bank’s independence. Markets are weighing the possibility of a larger 50 bp cut in September, but firmer inflation readings may curb enthusiasm. The slowdown in the labor market is now the central risk factor, adding uncertainty to the Fed’s decision.

Recent economic data continues to show weakness in jobs growth. The upcoming benchmark revisions by the Bureau of Labor Statistics could reduce employment figures by as much as 1 million, further amplifying concerns about the health of the labor market. At the same time, inflation reports are expected to show modest increases in August, suggesting that price pressures remain contained and will not block a further loosening of policy.

Fiscal developments also remain important. The federal deficit in the first seven months of the fiscal year reached nearly $920 billion, though this represents a modest improvement from the same period last year. The government has been spending tariff revenue at a rapid pace, which will keep budgetary dynamics in focus as investors assess longer-term fiscal sustainability.

Economic Drivers

  • Prospect of a renewed Fed easing cycle weighs on the dollar.
  • Concerns that partisan political pressures could erode Fed independence.
  • Firm inflation data likely to limit expectations for a 50 bp cut.
  • Slowing labor market is the main driver of policy uncertainty.
  • Large fiscal deficit remains a drag on sentiment, despite slight year-over-year improvement.

Data and Events

  1. 09 September 2025: Consumer Credit
  2. 10 September 2025: PPI
  3. 11 September 2025: CPI
  4. 11 September 2025: Unemployment Claims
  5. 12 September 2025: 30-y Bond Auction
  6. 12 September 2025: Prelim UoM Consumer Sentiment
  7. 12 September 2025: Prelim UoM Inflation Expectations

Price Action

  • Dollar Index briefly dipped below its 22 August low near 97.55 after the weak jobs data.
  • Support levels are identified near 97.30 and 97.00.
  • Resistance is seen around the pre-jobs report high at 98.25.
  • Market fully prices in a 25 bp cut this month, leaving little room for further downside unless conditions worsen.

Key Points:

  • Market is split between a 25 bp and 50 bp Fed cut, but inflation data argues against aggressive easing.
  • Labor market weakness remains the pivotal risk for the Fed’s decision.
  • Fiscal deficit trends highlight long-term structural concerns.
  • Dollar Index faces support near 97.30, with resistance at 98.25.

Australia & New Zealand

Overview

The Australian dollar’s performance continues to be shaped primarily by external currency relationships rather than domestic economic developments. The strongest influence is the US Dollar Index, with an inverse correlation of nearly 0.85 over the past 30 sessions, the highest since mid-2024. The Australian dollar is also closely linked to the Canadian dollar, with an inverse correlation of 0.82 over 30 sessions. In addition, movements in the offshore yuan maintain a moderate correlation near 0.60, underscoring the importance of global drivers for the Australian currency.

Australia’s domestic calendar is light, offering few significant releases that could alter monetary policy expectations. With only bank confidence surveys and a consumer inflation expectations survey scheduled, investors remain focused on the Reserve Bank of Australia’s policy outlook. The bar for easing appears high, and the futures market has consistently pared back expectations for cuts, marking six consecutive sessions of downgraded bets.

Economic Drivers

  • Australian dollar heavily influenced by the US Dollar Index, showing an inverse correlation of 0.85 over 30 sessions and 0.77 over 60 sessions.
  • Strong correlation with the Canadian dollar, inverse at 0.82 for 30 sessions and 0.78 for 60 sessions.
  • Moderate correlation with the offshore yuan near 0.60, reflecting global linkages.
  • High bar for RBA rate cuts as futures markets reduce easing expectations for six straight sessions.

Data and Events

  1. 09 September 2025: Manufacturing Sales (NZD)
  2. 09 September 2025: Westpac Consumer Sentiment
  3. 09 September 2025: NAB Business Confidence
  4. 11 September 2025: RBNZ Gov Hawkesby Speaks
  5. 11 September 2025: MI Inflation Expectations

Price Action

  • The Australian dollar briefly fell through $0.6600 last week but recovered and traded close to $0.6590 ahead of the weekend, its strongest level since 25 July.
  • Price action suggests likely consolidation rather than a breakout higher.
  • Key support levels identified in the $0.6480–$0.6500 range.

Key Points:

  • AUD driven largely by external currency correlations rather than domestic data.
  • Dollar Index remains the most important driver of direction.
  • Domestic data unlikely to influence RBA policy outlook this week.
  • Futures market has reduced expectations for easing for six consecutive sessions.
  • AUD likely to consolidate with support near $0.6480–$0.6500.

Canada

Overview

ParagraphThe Canadian dollar continues to underperform relative to its G10 peers, reflecting its sensitivity to the US dollar’s direction. Despite the broader weakness in the greenback last week, the Canadian dollar failed to capitalize, standing out as the only major currency that did not gain. This underperformance was compounded by weak domestic data, including a disappointing August employment report and a sharper-than-expected Q2 GDP contraction of -1.6% against forecasts of -0.7%.

Market sentiment toward the Bank of Canada has shifted significantly in light of recent developments. With economic momentum weakening, investors are increasingly pricing in the likelihood of a rate cut when policymakers meet on September 17. The odds of a cut have climbed sharply, reflecting concerns that growth and labor conditions may not justify keeping policy steady.

Economic Drivers

  • Canadian dollar highly sensitive to US dollar moves, underperforming despite broad G10 gains.
  • Weak Q2 GDP at -1.6% versus -0.7% expected highlights economic slowdown.
  • Disappointing jobs data reinforces growth concerns.
  • Rising expectations for a Bank of Canada rate cut, with market odds climbing to 73%.

Data and Events

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

Price Action

  • US dollar rebounded from a three-day low near CAD1.3760 after the US employment data.
  • Rally extended to CAD1.3840, with resistance seen at CAD1.3850–1.3860.
  • A sustained break higher could open a move toward CAD1.3900, with risks extending toward CAD1.40 in the coming weeks.

Key Points:

  • CAD underperformed while other G10 currencies gained against the US dollar.
  • Weak GDP and jobs data deepen concerns about Canada’s growth outlook.
  • Market pricing shows 73% odds of a BoC rate cut on September 17.
  • Technical setup points to potential US dollar strength toward CAD1.40.

China

Overview

Chinese officials have recently allowed the yuan to strengthen, with the dollar reference rate lowered steadily from CNY7.1586 at the end of June to CNY7.1030 by the end of August. This appreciation has raised speculation that policymakers are creating space for additional stimulus while maintaining currency stability.

China’s economy remains challenged by weak price pressures and structural efforts to rebalance growth. Authorities continue to redirect investment flows away from excess capacity and toward consumption-driven growth, but these adjustments will take time to filter through. In the short term, exporters appear to be finding alternative markets as US tariffs weigh on trade flows, helping to cushion the immediate impact. With inflation still subdued, policy conditions remain favorable for further easing if needed.

Economic Drivers

  • Yuan appreciation allowed by authorities, likely to provide cushion for future policy easing.
  • Shift of investment from industrial overcapacity toward consumption-led growth.
  • Resilient exports despite US tariffs, with alternative markets helping offset losses.
  • Weak inflationary pressures leave room for additional monetary stimulus.

Data and Events

  1. 08 September 2025: Trade Balance
  2. 09 September 2025: New Loans
  3. 10 September 2025: CPI
  4. 10 September 2025: PPI

Price Action

  • US dollar peaked near CNH7.15 last week before pulling back.
  • Year’s low was set on 29 August near CNH7.1160, which may be retested.
  • PBOC signaled caution by setting a stronger reference rate in four of last week’s five sessions.
  • Upward adjustment in daily fix suggests authorities are slowing the yuan’s advance.

Key Points:

  • Yuan allowed to strengthen in recent months, but PBOC shows signs of slowing appreciation.
  • Inflation remains weak, giving room for policy easing.
  • Trade resilience highlights China’s ability to find alternative markets despite US tariffs.
  • Structural reforms aim to shift growth toward consumption, though results will take time.
  • Dollar’s short-term support seen near CNH7.1160, but upside pressure remains managed.

Europe

Overview

The euro’s performance remains closely tied to shifts in relative bond yields, with the narrowing of the US two-year premium over Germany to a new yearly low near 155 bp giving the single currency support. Historically, such moves often coincide with periods of euro strength. Political risks, however, are in focus as France faces a confidence vote this week. A government collapse could trigger short-term volatility, though President Macron is expected to appoint another prime minister if necessary. While parliamentary elections are possible, a general election is ruled out since Macron cannot seek another term.

Economic momentum across the bloc remains weak, with industrial production figures from the four largest members due this week. However, the key event will be the European Central Bank’s policy meeting. The ECB is not expected to adjust interest rates but will provide updated staff projections and forward guidance. President Lagarde is likely to acknowledge the lagged effects of past tightening while signaling that some easing pressures remain in the pipeline.

Economic Drivers

  • Narrowing of the US-German two-year yield premium to 155 bp supports the euro.
  • French political instability could weigh on sentiment if the government falls.
  • Limited ECB forward guidance expected, with recognition of lagged monetary effects.
  • Weak economic backdrop, with German data continuing to highlight downside risks.

Data and Events

  1. 08 September 2025: German Industrial Production
  2. 08 September 2025: German Trade Balance
  3. 09 September 2025: French Industrial Production
  4. 09 September 2025: German 10-y Bond Auction
  5. 10 September 2025: Italian Industrial Production
  6. 11 September 2025: Main Refinancing Rate
  7. 11 September 2025: Monetary Policy Statement
  8. 11 September 2025: ECB Press Conference
  9. 12 September 2025: German Final CPI

Price Action

  • Euro climbed to $1.1760 after the US jobs report, its highest since late July.
  • Resistance levels lie at the late July high of $1.1780 and the multi-year high of $1.1830 from July 1.
  • Political uncertainty in France and poor German data could keep the euro rangebound in the near term.

Key Points:

  • Euro supported by narrowing US-German yield premium.
  • French confidence vote poses near-term political risk.
  • ECB meeting likely to confirm no policy change, with updated projections.
  • Weak German data and political concerns suggest rangebound trading.
  • Technical levels point to resistance at $1.1780 and $1.1830.

Japan

Overview

The yen’s exchange rate remains highly sensitive to movements in US interest rates, with shifts in Treasury yields continuing to dictate direction. Unless an unexpected Bank of Japan rate hike or other exogenous shock occurs, this correlation is unlikely to break in the near term. Current market expectations suggest little chance of a policy change at the upcoming BOJ meeting, leaving external factors as the dominant driver.

Japan’s domestic data is unlikely to alter this view. Revisions to Q2 GDP, initially reported at 0.3% quarter-over-quarter and 1% annualized, may be adjusted lower following weak capital expenditure. July industrial production, estimated at -1.6%, is also not expected to change the outlook. Seasonal dynamics will draw some attention to the current account and trade balance, though these releases are not typically market-moving.

Economic Drivers

  • Yen remains closely tied to US interest rate movements.
  • Weak domestic indicators, including GDP and industrial production, unlikely to shift BOJ policy outlook.
  • Seasonal patterns in current account tend to show improvement in July after June deterioration.
  • Market sees less than 50% chance of a BOJ hike this year, down from earlier expectations.

Data and Events

  1. 08 September 2025: Current Account
  2. 08 September 2025: Final GDP
  3. 09 September 2025: Prelim Machine Tool Orders
  4. 11 September 2025: PPI
  5. 12 September 2025: Revised Industrial Production

Price Action

  • US 10-year yield fell from 4.30% to below 4.10%, its lowest in five months.
  • Dollar weakened toward JPY146.80, with support seen at JPY146.50–60 and deeper support near JPY146.20.
  • Despite falling yields and a weak dollar, risk-reward favors a potential bounce if US CPI rises.
  • Dollar ended last week at its lowest level in more than a month.

Key Points:

  • Yen direction remains primarily driven by US yields.
  • Domestic data revisions unlikely to impact policy or market sentiment.
  • Market assigns less than 50% probability to a BOJ hike this year.
  • Technical support for USD/JPY lies at JPY146.50–60 and JPY146.20.
  • Dollar bounce possible if US inflation data strengthens yields.

United Kingdom

Overview

Sterling remains heavily influenced by the dollar’s direction, while also supported by the widening yield premium the UK offers relative to the US and Germany. Shifting expectations around the Bank of England have added complexity, with the odds of another rate hike falling sharply from certainty ahead of the last meeting to around 40% now. Fiscal risks are also under discussion, with speculation of new revenue measures including a possible surtax on banks.

Political uncertainty adds to the mix. The resignation of Deputy Prime Minister Rayner over a tax issue has presented fresh challenges for Prime Minister Starmer. Meanwhile, a seasonal adjustment problem reported by the Office for National Statistics overstated retail sales by as much as GBP2 billion, creating additional fiscal pressure on Chancellor Reeves. Despite these headwinds, sterling gained ground last week, largely driven by dollar weakness.

Economic Drivers

  • Sterling supported by the widening UK-US and UK-Germany rate premium.
  • Reduced probability of a Bank of England rate hike, with odds falling to around 40%.
  • Fiscal risk rising, with potential new revenue measures such as a bank surtax.
  • Political uncertainty following Deputy PM resignation over tax issue.
  • Retail sales data complications due to ONS adjustment error overstating figures.

Data and Events

  1. 12 September 2025: GDP
  2. 12 September 2025: Construction Output
  3. 12 September 2025: Goods Trade Balance
  4. 12 September 2025: Industrial Production
  5. 12 September 2025: Manufacturing Production
  6. 12 September 2025: Consumer Inflation Expectations

Price Action

  • Sterling fell to four-week lows near $1.3335 in midweek trading.
  • Rebounded strongly to $1.3555 ahead of the weekend, its highest since 18 August.
  • Resistance is seen in the $1.3565–$1.3600 area, a level tested in both July and August.
  • Macro backdrop suggests this range could prove difficult to break.

Key Points:

  • Dollar weakness was the main driver of sterling’s recovery last week.
  • UK yield premium continues to support the pound.
  • Market pricing for a BOE rate hike has fallen to 40%.
  • Political and fiscal pressures add to domestic uncertainty.
  • Resistance capped at $1.3565–$1.3600, limiting near-term upside.

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