Our assessment of the dollar's technical condition and the upcoming economic data appear to be aligning in a way that warns of the downside risks. The greenback has climbed on the sharp rise in interest rates. With the market discounting nearly 100 bp of tightening over the next 12 months, including a nearly 2/3 chance of a hike late next month, a few days ahead of the midterm election, we suspect the pendulum is unlikely to swing much further.
Our suspicion is partly a based on the methodological changes in the PCE deflator that may dampen, on the margins, price pressures, and US job and auto sales look to have slowed in September. The dollar's recent surge has left momentum indicators stretched, and the greenback approached some important technical levels. Below, we offer some levels that if taken out would boost confidence that a dollar high is in place.
US
Drivers: The Dollar Index recorded a low this month on September 9, nearly 95.60. It reached almost 101.40 on September 24, its highest level since late July. Since September 9, the US two-year yield rose almost 40 bp. The Fed funds futures are pricing in almost four more Fed hikes over the next 12 months. This is more aggressive than any Fed official, according to the latest Summary of Economic Projections. The pendulum of market expectations has swung dramatically, and there may be little more room based on the current and anticipated information set. The Fed funds futures market is pricing in nearly a 65% chance of a rate hike late next month. That seems unusually high given the little precedent for a change in policy a few days ahead of the midterm election.
Data: The labor market is front and center with the JOLTS report and ADP private sectors jobs estimate, culminating with the September employment report on October 2. The early estimates suggest hiring slowed to a little less than 110k from 162k in August. Through August, nonfarm payrolls have rinse by 80k a month compared with 20k average in the first eight months of 2025. The median forecast in Bloomberg's survey anticipates the unemployment rate to tick up to 4.2% from 4.1%, and small decline in the average work week. US economic growth in Q3 if the Atlanta Fed's GDP Tracker is accurate with exceed China's. Part of the reason is the continued resilience of the consumer despite weak consumer confidence. This will likely be evident in the August personal consumption expenditures, which are expected to have around twice as much as income (0.8% vs. 0.4%). The PCE deflator, which the Fed targets, can be largely extrapolated from the CPI and PPI. However, a methodological change (involving: 1. portfolio management and investment advice services; 2. computer software and accessories; 3. legal services) could shave the measure by an estimated 0.1%-0.3%. The revisions go back five years and will impact the estimates of other macroeconomic data, including GDP.
Prices: The momentum indicators for the Dollar Index are stretched. The Dollar Index met the measuring objective of the double bottom forged in August and September. It projected toward around 101.20. DXY stalled in front of the late July highs near 101.50. In June and July, it traded above 101.50 several times but managed to settle above it twice. It may take a break of the 100.50 area to suggest a top is in place.
EMU
Drivers: The euro continues to be sensitive to changes in US short-term interest rates. That is intuitive. Less intuitive is the inverse correlation of the changes in the euro and German two-year yields, which is to say that rising short-term German rates is correlated with a weaker euro. The inverse correlation is around -0.55 and -0.20, respectively, with changes in US and German two-year rates, respectively. In addition, for the first time since early February, the 30-day correlation of changes in the euro and the Stoxx 600 has become inverted this month.
Data: The final manufacturing PMI on October 1 is not going to capture the market's attention for long. Nor does the unemployment report draw much attention, though for the record, it has been 6.3%-6.4% since the start of last year. The most important data point is the preliminary September CPI on October 2. Headline CPI stood at 3.2% in August, and the core rate 2.4%. The ECB staff's latest forecast is for CPI to be at 3.0% at the end of the year and 2.5% next year. The swaps market has a little less than 50% chance of another hike at the October 29 ECB meeting. Nearly 70 bp of tightening is priced in through the end of Q1 27.
Prices: The nearly 3.75-cent euro loss in the past two weeks has stretched the momentum indicators as the euro approached its lowest level in two months around $1.1360. We anticipate a bottom and are looking for some kind of technical signal that a low is in place. A move above the $1.1450 area would be encouraging.
PRC
Drivers: The PBOC had set the dollar's reference rate lower for 10 consecutive sessions through Tuesday last week. Some suspect it was a cosmetic ahead of the summit. Beijing's willingness to accept a gradual appreciation of the yuan seemed to have increased recently, but the broad move is months long. Consider that on a weekly basis, the dollar's fix rose once in Q1 26, three times in Q2 and only twice so far here in Q3. This seemed to fuel expectations in some quarters of further yuan appreciation, but the PBOC seemed to check such expectations by warning that it would "prevent the 'herd effect' and self-reinforcement of irrational expectations."
Data: Industrial profits and the September PMI are the main features. However, high-frequency Chinese data does not explain the yuan's appreciation this year. The economic data has generally disappointed expectations, except for the trade surplus. The appreciation of the yuan does not sound impressive relative to its cost-of-production advantages and trade surplus. However, it has risen by about 4.5% this year, which is roughly twice the implied one-month volatility and one-year historic volatility of a little more than 2%.
Prices: The dollar made a new high for the month against the offshore yuan ahead of the weekend (~CNH6.7250), while the mainland markets were closed for the autumn holiday. Given the signal from the PBOC, and the five-day moving average poised to cross above the 20-day moving average for the first time since mid-July, the greenback may have potential toward CNH6.7500.
Japan
Drivers: The rolling 30-day dollar-yen correlation with US rates bottomed in early August near zero. However, link has been re-established. However, now the correlation of changes in the exchange rate and US rates is higher for the US two-year yield (~0.55) than changes in the 10-year yield (~0.45). The exchange rate is slightly inversely correlated with changes in Japan's two-year yield. The correlation with Japan's 10-year yield is around 0.30, the upper end of where it has been in four months, which is to say the dollar tends to rise against the yen as Japanese bond yields rise.
Data: The data early in the week, like retail sales, industrial production, and housing starts, will help economists tune their Q3 GDP forecasts. Economic growth is seen slower for the second consecutive quarter (1.9% in Q1 26, 1.4% in Q2 26, and 1.0% in Q3, annualized pace). The BOJ's Tankan Survey is expected to show a small improvement in sentiment and capex plans. Tokyo's September CPI, though, at the end of the week may be the most impactful. The swaps market has less than a 1-in-5 chance of a BOJ rate hike at its next meeting in late October and slightly more than a 50% chance of a hike before the end of the year, which seems low.
Prices: With the help of a particular type of verbal intervention, the yen snapped a five-day decline ahead of the weekend. The press reported that President Trump and Prime Minister Takaichi discussed the exchange rate and Finance Minister Katayama spoke of continued coordination with the US Treasury. The dollar fell by around 0.75%, its largest single day loss in nearly three weeks. The greenback finished the week below the trend line connecting the late July and early September highs, which had been violated on a closing basis on September 24.
UK
Drivers: The broad direction of the dollar, and especially against the euro, may be the best explanatory factor in sterling's movement. The inverse 30-day correlation between changes in sterling and the Dollar Index is near -0.82. The correlation with the euro is around 0.88. The correlation is much greater than with US or UK rates, or the differentials.
Data: The UK reports consumer credit and mortgage lending figures on September 29 and the final reading of Q2 GDP the following day. The final manufacturing PMI (October 1) typically does not elicit much of a market reaction. The swaps market is confident that the Bank of England will hike the base rate at its next meeting in early November (~85%) The market is pricing in nearly 100 bp of tightening between now and the end of H1 27.
Prices: Sterling began September near $1.3550 and was sold to almost $1.32 on September 24, its lowest level since late June. The momentum indicators are oversold. We are looking for some sign of a bottom. A move above $1.3280-$1.3300 may be persuasive.
Canada
Drivers: The 30-day correlation between changes in the US dollar against the Canadian dollar and the two-year rate differential is steady around 0.72. There was an inverse correlation as recently as mid-June. The US premium reached almost 155 bp from a low last month near 117 bp. Last year's peak was near 160 bp, the most since May 1997.
Data: July GDP will be reported on September 29. After expanding by 0.3% in May and June (0.6% in April), the risk is for a slight moderation in activity. The August manufacturing PMI is due October 1. Recall that Canada's manufacturing PMI was below the 50 boom/bust level last year starting in February. However, this year it held above 50 and averaged 53.1 in Q2 and about 53.2 July and August. The swaps market has about a 60% chance of a Bank of Canada rate hike at the next meeting on October 28.
Prices: The greenback reached CAD1.4155 ahead of the weekend, a marginal new high for the move, which could mark a top. The momentum indicators are stretched after rallying for the past three weeks. A push back below the CAD1.4085 area would likely confirm a corrective phase has begun.
Australia
Drivers: As one would expect, the changes in the Australian dollar are correlated with changes in two-year Australian interest rates. However, the 30-day correlation was inverse from early March through mid-May. The correlation now is a little below 0.25. What is striking is that the inverse correlation of changes in the exchange rate and changes in the US two-year yield is more than twice as large (~-0.63).
Data: The futures market is confident (~90%) that the Reserve Bank of Australia will deliver its fourth hike of the year on September 29. Another hike in Q1 27 is fully discounted, as well. The rate hike will steal the thunder from the August CPI due the following day. The July CPI was 3.5%, and the trimmed mean was at 3.6%. The August private sector credit is due at the same time. It rose a robust 8.4% year-over-year in July. Australia sees the final September manufacturing PMI and August trade figures on October 1. Australia's trade balance has deteriorated this year. In the first seven months of the year, the good trade surplus averaged A$1.27 bln a month. In Jan-July 2025, the average monthly goods surplus was A$4.52 bln. Despite reduction in the trade surplus, the Australian dollar is the second strongest G10 currency this year, up around 6.5% (trailing the Norwegian krone's 7.2% gain), On the face of it, the aggressively tighter monetary policy offers a better explanation than goods trade in lifting the Aussie this year.
Prices: The Australian dollar made a marginal new low ahead of the weekend but held above $0.7200. The nearly 3.25% decline since peaking on September 9 left the momentum indicators over-extended. It may take a move above $0.7055 to suggest a low is in place.
Mexico
Drivers: The peso was a beneficiary of carry trades. There are other currencies that offer higher yields, of course, but Mexico offers lower volatility and greater liquidity. The surge in US rates and firmer US dollar appeared to force an unwinding of such positions in a way that intervention-inspired short squeeze of the yen, did not. The dollar-peso remains a good proxy for the JP Morgan Emerging Market Currency Index, with a 30-day inverse correlation about -0.85.
Data: Mexico's data in the coming days are unlikely to have much impact on expectations for the central bank after last week's hike. While the domestic economy is fragile, the external account is solid. The August trade report is due September 28. In the first seven months, the average monthly trade surplus averaged $1.32 bln a month compared with $168 mln a month in Jan-July 2025. Worker remittances averaged about $5.17 bln a month through July this year, slightly more than the average in the first seven months of last year (~$4.97 bln). The August report is out on October 1. The IMEF surveys, also reported on October 1, are similar to PMI, though the market impact is often negligible.
Prices: The dollar surged nearly 3% against the Mexican peso last week. It was the largest gain since early March. The greenback reached almost MXN17.77 on September 24. The dollar consolidated ahead of the weekend, but the tone remained constructive though the momentum indicators are overbought and it remained above its upper Bollinger Band. Near-term risk may extend toward MXN17.85. Here, a break of MXN17.50-MXN17.53 area is needed to suggest a top is in place.
Reviewed by Marc Chandler
on
September 26, 2026
Rating:
