13/09/2025 Week Ahead

Fed Uncertainty & Crowded Trades Dominate the Week Ahead

Key Takeaways:

  • Five G10 central bank meetings are scheduled this week.
  • The Federal Reserve is expected to cut rates by 25 bp, though a 50 bp cut is not fully ruled out.
  • Political tensions are raising questions about the Fed’s independence.
  • US developments are reinforcing crowded trades: short dollars and long gold.
  • Dollar and bond yield trends point to tactical caution.

This week brings five G10 central bank meetings, with markets focusing primarily on the United States. The Federal Reserve is widely expected to deliver a 25 bp rate cut, though derivatives markets still see close to a 10% chance of a larger 50 bp move. The situation is complicated by political developments. On Monday, the Senate is expected to confirm President Trump’s nominee, Stephen Miran, as Fed governor, just hours before the FOMC meeting begins. Governor Waller has also suggested that further deterioration in the labor market could justify a deeper cut, raising the possibility of dissent within the committee. Such divisions risk adding to concerns over the Fed’s independence, already heightened by the Trump administration’s attempt to remove Governor Cook from her post. A legal ruling on that matter may come before markets open on Monday.

Global policymakers remain sensitive to these developments. Several foreign central bankers voiced concern at Jackson Hole about the political backdrop surrounding the Fed. Against this backdrop, the US and Canada are expected to ease policy this week, while the Bank of England and Bank of Japan are expected to hold rates steady.

Market positioning reflects a broader theme of crowded trades. The US dollar has been under sustained selling pressure, with gold benefiting from heavy demand. Yet these moves may be reaching exhaustion. The Dollar Index hit its low on July 1, the same day the euro and sterling reached multi-year highs. Meanwhile, the yen bottomed against the dollar back in April, highlighting divergences in timing. US yields continue to soften, with the 10-year dipping below 4.0% intraday last week for the first time since early April, and the 2-year yield reaching a five-month low near 3.46%. These dynamics suggest tactical caution is warranted, even if the broader trends remain intact.

United States of America

Overview

The US dollar is moving in step with interest rate expectations, showing a strong inverse correlation with Fed funds futures. The current 30-day reading of around 0.65 highlights how sensitive the currency has become to monetary policy signals, one of the highest levels seen this year. Earlier in the spring, tariff headlines briefly reversed the correlation, underlining how policy and politics continue to shape dollar movements.

This week’s main focus is the Federal Reserve. Markets are pricing in a rate cut as inflationary pressures remain but confidence grows in the easing cycle. The Senate’s vote on Stephen Miran’s nomination as Fed governor adds uncertainty, with the possibility he pushes for a larger 50 bp cut. Updated economic projections will reflect how Fed officials view the path ahead, particularly given that several policymakers in June expected no cuts this year. Futures are already signaling much lower rates for the end of next year compared with official projections.

Alongside rates, discussions may begin on quantitative tightening. Bank reserves are shrinking and the use of the Fed’s reverse repo facility is falling, raising speculation that reserves are already close to the “minimum ample” level. Governor Waller has suggested a level near $2.7 trillion, though uncertainty means the Fed is likely to proceed cautiously. Upcoming corporate tax payments and quarter-end funding pressures could offer an early test of market resilience, though bond volatility remains low.

In price terms, the Dollar Index remains stuck in a wide range. It bottomed at 96.35 in July, peaked at 100.25 in August, and is now testing lows again near 97.25. Sentiment is heavily negative, but a break above resistance between 98.30 and 98.75 could trigger a sharp short squeeze.

Economic Drivers

  • Strong correlation between the US dollar and interest rate expectations, with 30-day inverse correlation near 0.65.
  • Market confidence in a Federal Reserve rate cut despite elevated price pressures.
  • Potential for dissent at the FOMC meeting if Miran favors a larger 50 bp cut.
  • Falling bank reserves and lower reverse repo usage raising balance sheet management questions.
  • Quarter-end funding pressures and corporate tax outflows may expose financial strains.

Data and Events

  1. 15 September 2025: Empire State Manufacturing Index
  2. 16 September 2025: Retail Sales
  3. 17 September 2025: Building Permits
  4. 17 September 2025: Housing Starts
  5. 18 September 2025: Federal Funds Rate
  6. 18 September 2025: FOMC Economic Projections
  7. 18 September 2025: FOMC Statement
  8. 18 September 2025: FOMC Press Conference
  9. 18 September 2025: Unemployment Claims

Price Action

  • Dollar Index bottomed at 96.35 on 1 July and peaked at 100.25 in early August.
  • Recorded a low of 97.25 on 9 September, its weakest since late July.
  • Market sentiment remains largely negative toward the dollar.
  • A move above 98.30–98.75 resistance could prompt a short squeeze.

Key Points:

  • Dollar’s correlation with interest rate expectations is at one of its strongest levels this year.
  • The Fed is expected to cut rates, with projections likely revised lower.
  • Balance sheet reduction may enter policy discussions amid shrinking reserves.
  • Political uncertainty around Miran’s appointment introduces risk of dissent.
  • Dollar Index could see a sharp reversal if resistance levels are breached.

Australia & New Zealand

Overview

The Australian dollar has shown significant sensitivity to global market drivers, with correlations highlighting its shifting dynamics. In early September, the 30-day inverse correlation with the Dollar Index reached extreme levels near -0.85, the strongest since early 2024, before easing back toward -0.75. A similar pattern is seen against the US dollar’s exchange rate with the Canadian dollar. Meanwhile, the correlation with gold has weakened, dropping below 0.40 for the first time since late July.

The Australian dollar is also increasingly responsive to US rates. The 30-day inverse correlation with the US two-year yield stands near -0.57, close to its most extreme in over a year, while the correlation with the two-year differential has moderated to around 0.30, well below January’s high of 0.65. In contrast, the link with Australia’s own two-year yield is muted at under 0.10, suggesting domestic rates play a smaller role in current price action.

On the domestic front, labour market data due this week will be closely watched. While the Reserve Bank of Australia is not expected to cut rates at its upcoming meeting unless employment data shows significant deterioration, job creation has slowed this year compared with 2024. The unemployment rate remains steady at 4.2%, and participation is holding at 67%, near recent highs.

Economic Drivers

  • Strong inverse correlation between the Australian dollar and the Dollar Index, with early September extremes near -0.85.
  • Correlation with gold weakened to below 0.40, the lowest since late July.
  • Rising sensitivity to US rates, with 30-day inverse correlation to the US two-year yield near -0.57.
  • Domestic employment growth slowing, averaging 16.2k jobs per month this year, compared with stronger 2024 levels.
  • Stable unemployment rate at 4.2% and participation rate at 67%.

Data and Events

  1. 17 September 2025: Westpac Consumer Sentiment (NZD)
  2. 17 September 2025: Current Account (NZD)
  3. 17 September 2025: MI Leading Index
  4. 18 September 2025: GDP
  5. 18 September 2025: Employment Change
  6. 18 September 2025: Unemployment Rate
  7. 19 September 2025: Trade Balance (NZD)

Price Action

  • Australian dollar reached a yearly high near $0.6670 before retreating, just below the 200-week moving average at $0.6680.
  • Since 22 August, it has been the best performing G10 currency, gaining about 3.4%.
  • Momentum indicators are stretched, with initial support at $0.6590–$0.6600.

Key Points:

  • Australian dollar correlation with the Dollar Index hit its strongest in over a year.
  • Gold link weakened, while sensitivity to US yields increased.
  • Domestic job creation has slowed, but unemployment remains stable at 4.2%.
  • RBA unlikely to cut rates without sharp deterioration in employment.
  • AUD/USD faces resistance near $0.6680, with support around $0.6600.

Canada

Overview

The Canadian dollar is displaying its usual pattern of tracking closely with the broader movement of the US dollar. Historically, it performs better when the US dollar is firm and tends to underperform when the US dollar softens. This trend remains intact, with the rolling 30-day correlation between the two currencies slightly below 0.70. Late August saw the correlation peak near 0.80, the strongest level in more than a year.

This week brings key domestic data and a central bank decision. Inflation remains subdued, with headline CPI holding between 1.7% and 1.9% year-over-year for four consecutive months, though base effects from last year’s declines suggest some upside risk. Core inflation remains slightly above 3%, keeping price pressures elevated even as economic growth weakens. Canada reported a sharper-than-expected contraction in Q2 and soft employment figures for August, adding pressure on the Bank of Canada. Markets are pricing in a high probability of a rate cut at this week’s meeting, which will be closely watched given its proximity to the US Federal Reserve decision.

Economic Drivers

  • Canadian dollar typically performs better when the US dollar is strong, and underperforms when the US dollar is weak.
  • Strong rolling 30-day correlation with the US dollar, currently just below 0.70, with late August peak near 0.80.
  • Headline CPI between 1.7%-1.9% year-over-year for four straight months, with core rates slightly above 3%.
  • Economic contraction in Q2 and weak August employment report add pressure on policymakers.
  • Market expectations show about an 87% chance of a Bank of Canada rate cut this week.

Data and Events

  1. 15 September 2025: Manufacturing Sales
  2. 15 September 2025: Wholesale Sales
  3. 16 September 2025: Housing Starts
  4. 16 September 2025: CPI
  5. 17 September 2025: BOC Rate Statement
  6. 17 September 2025: Overnight Rate
  7. 17 September 2025: BOC Press Conference
  8. 19 September 2025: Retail Sales

Price Action

  • US dollar advanced from CAD1.3725 on 29 August to near CAD1.39 last week.
  • Pullback tested support around CAD1.3825 (38.2% retracement of rally) and CAD1.3820 (20-day moving average).
  • Further support seen near CAD1.3780.
  • Resistance remains at August high of CAD1.3925, with a break above targeting CAD1.40.

Key Points:

  • Canadian dollar highly correlated with US dollar moves, correlation near 0.70.
  • CPI data and BoC meeting are this week’s main events.
  • Inflation remains low but core pressures hold above 3%.
  • Economic weakness increases probability of a rate cut.
  • USD/CAD resistance lies near 1.3925–1.40, with support at 1.3780.

China

Overview

China continues to carefully manage the yuan, maintaining a policy of stability against the US dollar. The offshore yuan shows a modest correlation with broader global moves, tracking positively with the dollar-yen pair and the Dollar Index, while showing a weaker, inverse relationship with the euro. This reflects Beijing’s strategy of anchoring the currency while still allowing some market-driven adjustments.

Attention this week turns to a series of important domestic indicators. Fixed asset investment is expected to have slowed further in August, extending a downtrend that began in April, with the July pace already the weakest since the pandemic. Real sector activity, including retail sales and industrial production, is forecast to improve slightly on a year-over-year basis, though property market weakness persists. Home prices are expected to continue falling, with investment still failing to recover in the sector.

In markets, the yuan strengthened to its best level of the year near CNH7.1130 before easing back toward CNH7.1250. A sustained move above CNH7.15 would mark a significant technical shift. Equity market gains and speculation that the PBOC could expand bond purchases in Q4 may support renewed foreign interest. At the same time, the PBOC has been guiding the daily dollar fix lower, though keeping it above CNY7.10. A decisive break below this level would likely fuel expectations of further yuan appreciation toward CNY7.00.

Economic Drivers

  • Exchange rate policy prioritises broad stability against the US dollar.
  • Offshore yuan correlation with the Dollar Index near 0.37, inverse correlation with the euro at -0.31, and positive correlation with dollar-yen near 0.47.
  • Fixed asset investment slowdown continues, with July pace at 1.6%, the weakest since the pandemic.
  • Retail sales and industrial production expected to improve modestly year-over-year.
  • Housing market remains under pressure, with prices trending lower and investment yet to recover.
  • Speculation that the PBOC could renew bond purchases in Q4 may boost capital inflows.

Data and Events

  1. 15 September 2025: New Home Prices
  2. 15 September 2025: Industrial Production
  3. 15 September 2025: Retail Sales
  4. 15 September 2025: Unemployment Rate
  5. 18 September 2025: Foreign Direct Investment

Price Action

  • Offshore yuan reached new yearly high at CNH7.1130 before easing to CNH7.1250.
  • Resistance stands at CNH7.15, with a break higher viewed as technically significant.
  • PBOC lowered the dollar fix in four of five sessions last week but kept it above CNY7.10.
  • A move below CNY7.10 could drive expectations toward CNY7.00.
  • Strong domestic equity performance supports sentiment for the yuan.

Key Points:

  • China is maintaining a stable yuan policy while allowing moderate correlation with global moves.
  • August data will be closely watched for signs of resilience in consumption and production.
  • Fixed asset investment remains weak, highlighting structural headwinds.
  • Yuan support is underpinned by equity market strength and possible PBOC bond buying.
  • Break of CNY7.10 would raise expectations for a stronger yuan toward CNY7.00.

Europe

Overview

The euro’s behavior remains closely linked to movements in short-term yields, particularly in relation to the US. At present, the 30-day rolling correlation between changes in the euro and Germany’s two-year yield is inverse at around -0.35. This is a shift from the positive correlation that prevailed from late 2024 through mid-2025. More notably, the euro shows a strong inverse correlation of -0.77 with the US two-year yield, underscoring the dominant influence of US rates on the single currency. The euro also maintains an inverse correlation of around -0.60 with the US-Germany two-year yield spread, highlighting the persistent rate differential as a key driver.

In the credit space, Fitch downgraded France to A+ from AA- with a stable outlook, largely expected by markets. At the same time, Portugal was upgraded to A from A-, and S&P lifted Spain’s rating to A+ from A, reflecting improved external balances and private sector deleveraging. Despite these adjustments, yield spreads remain relatively contained, with France’s 10-year yield just 22 bp above Spain, 38 bp higher than Portugal, and slightly below Italy’s.

From a growth perspective, Eurozone data releases for July add little fresh insight, as most national figures were already known. Industrial production data showed uneven results: Germany rose 1.3%, Italy 0.4%, France fell 1.1%, and Spain slipped 0.5%. The bloc’s Q3 growth is expected to remain subdued at around 0.1%, in line with Q2.

Economic Drivers

  • Inverse correlation between the euro and Germany’s two-year yield at -0.35.
  • Strong inverse correlation with US two-year yield at -0.77.
  • Euro also inversely correlated with the US-Germany two-year yield spread at around -0.60.
  • Fitch downgraded France to A+ from AA-, while Portugal was upgraded to A and Spain to A+.
  • Eurozone growth momentum remains weak, with Q3 expected near 0.1%.

Data and Events

  1. 15 September 2025: Trade Balance
  2. 16 September 2025: ECB President Lagarde Speaks
  3. 16 September 2025: German ZEW Economic Sentiment
  4. 16 September 2025: Industrial Production
  5. 17 September 2025: ECB President Lagarde Speaks
  6. 17 September 2025: Final CPI
  7. 18 September 2025: ECB President Lagarde Speaks
  8. 18 September 2025: Current Account
  9. 19 September 2025: German PPI

Price Action

  • Euro has traded in a $1.16–$1.18 range for over a month.
  • Despite intraday breaks below $1.16, it has not closed outside the range since 5 August.
  • Five-day moving average has remained above the 20-day moving average since 8 August.
  • One-month implied volatility at 6.5%, lowest since November 2024.
  • Three-month implied volatility just below 7%, slightly above the March low near 6.9%.

Key Points:

  • Euro remains highly sensitive to US and German yield dynamics.
  • Ratings changes in France, Spain, and Portugal highlight diverging fiscal trajectories.
  • Industrial production is mixed across member states, pointing to fragile growth.
  • Euro is confined within a narrow trading band with historically low volatility.
  • Q3 economic outlook remains weak, with growth expected around 0.1%.

Japan

Overview

The yen remains closely tied to movements in US interest rates, with correlations highlighting the strength of this relationship. Over the past 30 sessions, the yen’s exchange rate has shown a stronger correlation with the US two-year yield (0.83) than with the 10-year yield (0.77). The correlations with yield differentials also remain significant, with the US-Japanese two-year spread at 0.63 and the 10-year spread slightly above 0.65. Both reached two-year highs earlier this month near 0.85, underscoring the yen’s heavy dependence on external rate dynamics rather than domestic conditions.

On the domestic side, Japan’s economy shows modest but uneven growth across sectors. The tertiary sector expanded by an average of 0.4% in the first half of 2025, compared with 0.3% growth in industrial output. This week’s releases will provide updates on both activity and inflation trends. The Tokyo CPI already indicated that nationwide inflation slowed in August, with headline and core measures likely slipping below 3% for the first time since late 2024. This would mark the fourth straight decline in headline inflation and the third in the core measure. The Bank of Japan meets after the CPI release, with no rate change expected, though market participants will scrutinize Governor Ueda’s comments for future guidance.

Economic Drivers

  • Strong correlation between yen and US yields: 0.83 with the two-year and 0.77 with the 10-year.
  • Exchange rate correlation with the US-Japanese two-year spread near 0.63, and with the 10-year spread slightly above 0.65.
  • Tertiary sector expanded by an average of 0.4% in H1 2025, industrial output by 0.3%.
  • Inflation expected to slow below 3% in both headline and core measures, extending recent declines.
  • BOJ unlikely to change rates but policy outlook will depend on Ueda’s forward guidance.

Data and Events

  1. 16 September 2025: Tertiary Industry Activity
  2. 17 September 2025: Trade Balance
  3. 18 September 2025: Core Machinery Orders
  4. 19 September 2025: National Core CPI
  5. 19 September 2025: BOJ Policy Rate
  6. 19 September 2025: Monetary Policy Statement
  7. 19 September 2025: BOJ Press Conference

Price Action

  • Trading range last week set between JPY146.30 and JPY148.60.
  • Market appears positioned to retest the upper end of the range.
  • US yields rebounding from recent lows could support yen weakness.
  • Implied yen volatility remains low, slightly above August’s year-to-date lows.

Key Points:

  • Yen remains highly sensitive to US yield movements, with correlations near multi-year highs.
  • Domestic growth is modest but stable, led by the services sector.
  • Inflation is expected to fall below 3%, continuing a declining trend.
  • BOJ meeting will likely keep rates unchanged but verbal guidance is key.
  • Yen trading within JPY146.30–JPY148.60 range, with volatility subdued.

United Kingdom

Overview

Sterling remains highly sensitive to the broader direction of the US dollar, with strong correlations showing how external drivers dominate. The 30-day inverse correlation between sterling and the Dollar Index is currently near -0.80, a level consistent with recent trends but still below the extreme readings of 2023 and 2024. Sterling also tracks closely with the euro, with the correlation near 0.84. Sensitivity to rate dynamics is notable, with the exchange rate inversely correlated with the US two-year yield at -0.57, compared with -0.32 for the UK two-year Gilt. The inverse correlation with the two-year rate differential stands at -0.52, further reinforcing the role of cross-market rate moves.

The coming week is one of the most important for UK markets, with jobs, inflation, retail sales, and the Bank of England’s policy decision all on the calendar. Labour market data continues to show signs of weakening, as companies cut jobs at the fastest pace in four years. Inflation may ease slightly but will remain elevated, keeping the BOE cautious. Unlike the Federal Reserve’s dual mandate, the BOE’s focus on price stability has encouraged officials to delay rate cuts. Market pricing does not anticipate the next rate cut until April 2026. Retail sales data, due after the BOE meeting, will provide further insight into consumer resilience after recent quarterly weakness.

Economic Drivers

  • Sterling strongly influenced by overall dollar trends, with a 30-day inverse correlation of -0.80 with the Dollar Index.
  • High positive correlation with the euro at around 0.84.
  • Inverse correlation with US two-year yield at -0.57, weaker link with UK two-year Gilt at -0.32.
  • Labour market conditions weakening, with layoffs at a four-year high.
  • Inflation remains elevated despite potential minor decline.
  • BOE focused on price stability, with markets not fully pricing next rate cut until April 2026.

Data and Events

  1. 16 September 2025: Average Earnings Index
  2. 16 September 2025: Claimant Count Change
  3. 16 September 2025: Unemployment Rate
  4. 17 September 2025: CPI
  5. 18 September 2025: Monetary Policy Summary
  6. 18 September 2025: MPC Official Bank Rate Votes
  7. 18 September 2025: Official Bank Rate
  8. 19 September 2025: Retail Sales

Price Action

  • Sterling tested $1.36 last week but failed to break higher, consistent with resistance since mid-July.
  • Initial support seen near $1.35.
  • The 20-day moving average sits slightly below, aligning with the 38.2% retracement of September’s rally.
  • The 50% retracement level lies around $1.3460.

Key Points:

  • Sterling remains closely tied to dollar direction and euro movements.
  • Labour market weakness and persistent inflation keep BOE cautious.
  • No near-term rate cuts expected, with April 2026 priced as the earliest.
  • Major data releases this week will shape sentiment alongside the BOE meeting.
  • Resistance at $1.36 holds, with support at $1.35 and deeper levels near $1.3460.

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