The Middle East war, for which President Trump has claimed victory many times, continues to be a powerful disruptive force. Iran is not hunkering down in a defensive position but has gone on the offensive. The combination of Ukraine's success, hitting Russian refinery capacity, the drop in Saudi output, the increased buying by China, and the Houthis success in securing the Bab-el-Mandeb Strait has driven a surge in oil and diesel prices. This, in turn, has lifted market rates and unsettled equity markets.
The week ahead features three G10 central bank meetings. The market is confident that the Bank of Japan will deliver a quarter-point hike and sound sufficiently hawkish as to support market expectations for a December move as well. The Bank of England will most likely deliver a hawkish hold--stand pat now but suggest a rate hike is coming. Of the central banks, the Federal Reserve's outlook is the most in doubt. The futures market is fairly confident of a hike (~87%), but economists are less sanguine. The slippage in the core CPI to 2.4% in August is the lowest in five, Nevertheless, the US two-year yield rose to 4.65% before the weekend, which is more than 25 bp higher than when Fed Chair spoke at Jackson Hole, touting the benefits of the market signal not distorted by forward guidance. Nor was US Treasury's increased bond buyback much of an inspiration. The market was disappointed with the announcement and the operation itself.
US
Drivers: The US continues to be seen as among the best in the G10 to cope with rise in oil prices. Moreover, the risk of a Fed hike this week has risen. According to the pricing of the Fed funds futures, there is almost an 87% chance of a hike discounted, up from a little more than 60% a week ago. A Bloomberg survey, conducted September 4-9, found only 13 of 48 economists expect the Fed to hike. However, by the weekend, it looked most economists had changed their minds. Given the hawkish takeaway from Fed Warsh's Jackson Hole speech, the failure to hike could see the yield curve steepen and the dollar weaken.
Data: The US reports August retail sales, industrial production and housing starts in the coming days. The data points will help shape expectations for Q3 GDP. The July portfolio flow capital report from the US Treasury (TIC) also will be reported. Through June, the TIC report showed foreign investors bought about $617.7 bln of US stocks and bonds, which is a little more than $200 bln less in H1 25. The Q2 current account has not been released, but we do know that the trade shortfall narrowed in H1, suggesting the funding requirements may be smaller. The US recorded a trade deficit of almost $359 bln in H1 26 compared with a deficit of $560.5 bln in H1 25. However, the most important data point in the week ahead is from the Federal Reserve. The market sees the outcome finely balanced after the jobs data and inflation gauges. The Federal Reserve will also update the Summary of Economic Projections. Chair Warsh did not submit his projections at his first meeting at the helm in June and seems unlikely to participate this time.
Prices: The Dollar Index reached a new high for the week after the US CPI report ahead of the weekend, near 99.40. It approached the (61.8%) retracement of the losses from the September 2 high (~99.85). The trendline, drawn off the late July high and the early September high, came in slightly above the pre-weekend high. At the end of the week ahead, the trendline is near 99.10. The Dollar Index settled lower for the second consecutive week, suggesting a possible decoupling from rates, which we will be monitoring.
EMU
Drivers: Rising two-year German yields does little to help the euro. The 30-day correlation is inverse (-0.20), which has been the case since the end of February, with the brief exception in late July. The inverse correlation with the US two-year yield is twice as much (-0.45). This shows that a rising interest rate environment is not associated with a stronger euro. The inverse correlation with changes in US two-year premium over Germany is about -0.40.
Data: The eurozone reports July trade balance, current account industrial production, and construction output. Yet, with the ECB meeting behind us and the recognized strong probability of a hike in December, the high-frequency data points may have little market impact. Germany sees the September ZEW investor survey on September 15. The assessment of the current situation has been improving though it took a hit in Q2, perhaps related to the disruption of the Middle East war, it improved in July and August and reached its best level in three years. The expectations component also weakened in the early months of the Middle East war but has trended higher for the past four months. It reached a six-month high in August of 34.2. Two more German state elections will be held on September 20.
Prices: The euro fell slightly below $1.1570 after the US CPI
but held above the September 2 low (~$1.1565). It was recovered quickly and
recaptured $1.1600, but still settled sliightly below it. The week's high was near $1.1655. A break of the $1.1565 area could target $1.1530 next. The momentum indicators are not generating robust
signals and one-month implied volatility has slumped to around 4.9%, its lowest
level in almost a month. The low for the year was recorded last month near
4.45%.
PRC
Drivers: Beijing's decision to accept gradual appreciation of the yuan seems ultimately political in nature. Still, it seems to track the broad movement of the dollar. The correlation between the dollar against the offshore yuan and the Dollar Index is a little above 0.55 for the past 30 days, 0.54 for the past 60 days, and near 0.60 for the past 100 days.
Data: This is the week for China's macroeconomic data. It includes house prices, retail sales, industrial production, capex, property investment, and residential property sales. The property market continues to bleed. In some ways, the particulars do not matter. The economy is underperforming what Beijing wants. Yet, it seems to be in no hurry to provide new support.
Prices: The US dollar has approached CNH6.70 and the PBOC reduced the lower fix in the past three sessions (CNY6.7743 before the weekend, a new multiyear low). Beijing continues to signal acceptance of a gradually appreciating yuan. Critics want it to go faster, and they claim this is what "fundamentals" require. The fundamental is the trade balance but there are other fundamental considerations, such as the interest rate differential. The US 10-year premium over China is nearly 325 bp, which is the most in at least 20 years.
Japan
Drivers: The late July intervention has injected a new consideration into trading the Japanese yen. It has diluted the impact of changes in the US 10-year yield. The 100-day correlation reached the high of the year in late July, near 0.52. and it is now at the low for the year (~0.32). The 30-day correlation is around 0.30, after having slipped briefly into inversion in early August. The 30-day correlation between the exchange rate and the US two-year yield has risen from about 0.20 in early August to almost 0.35 now. Over the past 30 days, the correlation between changes in the Japan's two-year yield and the exchange rate is slightly inverse. This is also true of the correlation over the past 100 days. It was inverse through late June before turning positive and reached the high for the year slightly above 0.20 before the late July intervention.
Data: The highlight in the coming week is the Bank of Japan meeting. It is nearly a foregone conclusion that the BOJ will hike by 25 bp to 1.25% and not push back against strong expectations of another hike before the end of the year. This seems independent of the vagaries of the high frequency economic data. This includes the August CPI, which is due a few hours before the BOJ meeting concludes on September 18. From the release of the Tokyo CPI, we already have a good idea that the national CPI likely accelerated slightly. The headline pace may rise to 2.0% from 1.9%. The core rate, which excludes fresh food, may edge up to 1.9% from 1.8%. The measure that excludes fresh food and energy also may have nudged up to 2.0% from 1.9%. The core rate has not been above the 2% target this year. Every country measures CPI differently but Japan's performance would be the envy of most countries, where inflation has overshot targets for years. Year-over-year growth in Japan is among the weakest among the G10 at around 0.7% year-over-year.
Prices: The surge in oil prices and jump in US yields helped
the dollar stabilize after falling a little below JPY152.90 on September 8. However,
the greenback stalled in front of JPY154.70. Previous support around JPY155 now
acts as resistance. The euro decline after the ECB's well-telegraphed rate
hike. So did the New Zealand dollar after the RBNZ's recent hike. A BOJ hike,
and even hawkish comments by Governor Ueda, allowing for a December move, as
well, may not spur a stronger yen. It is not yet clear from the weekly
portfolio flows that rising rates and the intervention will spur the kind of
powerful repatriation that some anticipate. The Japanese fiscal half year ends
this month, and it is often associated with new allocation decisions. In the
five weeks since the intervention, Japanese investors have sold few foreign
bonds than in the five weeks before the intervention. For their part, foreign
investors have flipped from net sellers of Japanese bonds in the five weeks
before intervention to small buyers since.
UK
Drivers: Sterling remains inversely correlated with the Dollar Index, but over the past 30 days, the inversion has weakened to around -0.75. At the end of August, it was near -0.85, and in April it recorded the most extreme of the year around -0.93. The 30-day correlation of changes in the sterling and euro are near 0.86. It has not been above 0.90 since mid-May. Sterling is inversely correlation with changes in the UK's two-year yield (~-0.25). It has been inversely correlated since early April, though it was positively correlated in January and February.
Data: The Bank of England meeting on September 17 renders the important economic data for the week, the three data points that the market is often most sensitive to, less significant. The BOE is on hold, but the swaps market is confident that a hike will be delivered in Q4. What pushes the central bank to hike will not rest much on next week's employment, inflation, and retail sales reports. After growing by about 0.5% in H1 26, the UK economy is projected to slow. However, Q3 is off to a better start than expected. Before the weekend, the UK reported an unexpected 0.4% rise in July GDP, its best monthly performance since February, and matched the second strongest since January 2024. It was apparently flattered by AI-related activity.
Prices: Sterling tested a shelf that has been forged in the $1.3475-80 area ahead of the weekend and recovered to new session highs near $1.3535. While it looks constructive, sterling needs to overcome resistance in the $1.3575-$1.3600 area to be important. Some pressure on sterling, coming from the cross against the euro, appears to have subsided. A push by the euro below GBP0.8550 could lend credence to this view.
Canada
Drivers: The 30-day correlation of the US dollar against the Canadian dollar and the two-year differential has been steady, hovering around 0.70 for the past several weeks. This is about twice the correlation of the exchange rate and changes in the US two-year yield. The exchange is inversely correlated with changes in the Canadian two-year yield. It is now around -0.22, which is almost half as inverse as it was at the end of August. The US dollar against the Canadian dollar has a little more than a 0.80 correlation with changes in the Dollar Index over the past 30 days, which is the highest since early March.
Data: The most important high-frequency data point is the August CPI on September 14. While headline inflation in July was 3%, the underlying core rates are around 2%. The central bank has some breathing space to see the impact of the recent shocks. The swaps market continues to look for a hike in Q4 and another in Q1 27.
Prices: Before the US-Canada talks broke down, the US dollar settled near CAD1.3760. Early last week, it returned to it. However, this seems to be part of a messy correction of the US dollar's decline since peaking in late June/early. Before the weekend the greenback reached almost CAD1.3885, a seven day high. A move above the CAD1.3930 area could target the CAD1.4000-CAD1.4050 area.
Australia
Drivers: Changes in the Australian dollar are positively correlated with changes in Australia's two-year yield but near 0.18, it is the lowest in around a month. The Aussie is inversely correlated with changes in the US two-year yield (~-.054), the most in three weeks. The exchange rate's inverse correlation with changes in the Dollar Index is near -0.62, while the inverse correlation with the US dollar against the offshore yuan is also around -0.62.
Data: Australia's data calendar is devoid of high-frequency data. The highlight of the week comes at the end as RBA Governor Bullock testifies before parliament. She is on record warning that the central bank may need to do more to restrain price pressures. Bullock has led the central bank to hike rates three times in the first five months of the year. The market is confident of at least one hike this year, with almost an 80% chance it comes late this month, up from about 66% chance a week ago.
Prices: The Australian dollar fell to a seven-day low before
the weekend, near $0.7150. It has settled below the 20-day moving average the
previous day (September 10) for the first time since late July. However, it
recovered and made a new session high in the North American morning slightly
shy of $0.7190. The market does not appear to have given up trying to secure a
foothold above $0.7200. It traded above $0.7200 in the six sessions before September
11 but stalled near $0.7240 before bout of profit-taking in the last two
sessions.
Mexico
Drivers: The Mexican peso serves as a proxy for emerging market currencies. The US dollar against the peso moves inversely to the JP Morgan Emerging Market Currency Index. The 30-day inverse correlation is near -0.76, and the 100-day inverse correlation is near -0.82. The 30-day correlation between the exchange rate and the Dollar Index is around 0.64 and the 100-day correlation is about 0.60. The little change between the two periods suggest a stable relationship presently. The peso has a risk element too as the 30-day inverse correlation between the exchange rate at the S&P 500 is around -0.42, while the 100-day inverse correlation is near -0.62.
Data: Mexico has a light economic calendar, and nothing with the heft to change expectations that the central bank will stand pat when it meets on September 24. Separately, Brail central bank meets on September 16, and the swaps market has nearly fully discounted the fourth rate cut of the year, which will bring the Selic to 13.75%.
Prices: The US dollar consolidated against the Mexican peso
last week. It traded between about MXN16.87, seen to start the week, to a
little above MXN17.00 in the last two sessions. On both sessions, it settled
above the 20-day moving average for the first time July 24. The high from late
August was around MXN17.0650. The momentum indicators look constructive.
Reviewed by Marc Chandler
on
September 12, 2026
Rating:
