Dollar ends the week under pressure as PMIs test the growth outlook
Market overview
FX markets head into Friday with the dollar under sustained pressure, despite a renewed rise in US Treasury yields and relatively resilient economic data. DXY is down almost 0.9% over the week near 98.8, EUR/USD is trading around 1.1690 after reaching a 14-week high, and GBP/USD has pushed above 1.36 to its strongest level in six months. The common driver remains this week’s unexpected expansion of US Treasury bond buybacks, which has revived concerns over US fiscal policy and prompted investors to question whether the dollar will increasingly absorb the pressure created by attempts to contain long-term borrowing costs.
The bond market itself is proving less cooperative. Wednesday’s intervention briefly pushed long-term yields lower, but the US 10-year has subsequently returned towards 4.71% and the 30-year towards 5.25%. That combination — rising Treasury yields alongside a weaker dollar — is unusual and reinforces the impression that the currency is currently trading less on conventional interest-rate differentials and more on confidence in the wider US policy framework. Oil remains another source of uncertainty, with Brent briefly reaching $94.71 overnight as the stalemate between the US and Iran continued to restrict flows through the Strait of Hormuz.
Today shifts attention back towards economic fundamentals, with flash PMI surveys due across the UK, eurozone and US. The releases will provide an early view of August activity and could test whether the softer dollar can continue to outweigh evidence that US growth remains comparatively strong.
USD: Stronger data fails to rescue the dollar
The dollar remains on course for a sizeable weekly decline despite Thursday’s US data offering few signs of an imminent downturn. Initial jobless claims fell to 206,000 from 212,000, below expectations for 210,000, while the Philadelphia Fed manufacturing index unexpectedly strengthened to 47.4 from an already robust 41.4. The fact that neither release generated a meaningful dollar recovery suggests economic data have temporarily taken a back seat to the broader debate surrounding Treasury policy and US institutional credibility.
This week’s expansion of the Treasury buyback programme remains the principal catalyst. Officials have signalled that they are increasingly uncomfortable with elevated long-term borrowing costs, but Wednesday’s initial relief has proved short-lived. Treasury Secretary Scott Bessent has subsequently suggested that purchases could be increased further, yet 30-year yields have already returned towards 5.25%. Markets appear willing to test how far policymakers are prepared to go, particularly when the underlying pressures of large fiscal deficits, heavy debt issuance and elevated interest costs remain unresolved.
The resulting dollar weakness has so far been relatively orderly. ING argues that the move can be viewed as a “risk-friendly” adjustment rather than the beginning of a funding or confidence crisis. Lower perceived pressure on the long end of the Treasury curve supports equities and higher-beta currencies, while allowing the dollar to weaken without generating the usual flight towards safe-haven assets. That environment is particularly supportive of currencies such as sterling and the Australian dollar.
There are nevertheless limits to how far the dollar can fall without reinforcement from the economic data. US activity continues to compare favourably with most developed economies, and today’s flash PMIs are expected to confirm another month of expansion. Manufacturing is forecast around 54.0, broadly unchanged from 53.9 in July, while services are expected to ease to approximately 53.9 from 54.6. Stronger readings would challenge some of the recent dollar selling, although the currency’s muted response to Thursday’s data suggests the bar for a meaningful recovery may currently be high.
GBP: Six-month high masks a mixed UK backdrop
Sterling is heading for a fourth consecutive weekly gain against the dollar, with GBP/USD trading around 1.3650 and having reached its highest level in six months. The move has carried the pair comfortably above its main daily and weekly moving averages, although the strength remains primarily a reflection of dollar weakness rather than a major improvement in the UK outlook.
This morning’s retail sales data reinforce that distinction. Sales volumes fell 0.5% month-on-month in July, matching expectations, while June’s increase was revised to 0.7%. On an annual basis, sales rose only 1.6%, below the 2.2% consensus. Excluding fuel, monthly sales declined a sharper 0.9%. The figures suggest household spending remains uneven despite a noticeable improvement in consumer sentiment.
That improvement in sentiment is worth noting. GfK consumer confidence rose to -14 in August from -17, considerably better than the -18 expected and its strongest reading in around two years. Consumers therefore appear more optimistic about the outlook even if that confidence has yet to translate into stronger spending.
Against the euro, sterling’s performance has been far less impressive. GBP/EUR is around 1.1670 after briefly falling towards 1.1650 earlier in the week. That divergence is important: the pound is participating in the broader dollar sell-off but is not materially outperforming other European currencies. It leaves GBP/USD looking increasingly stretched relative to the underlying UK story, with CIBC estimating fair value closer to 1.35 and highlighting resistance around 1.3680-1.3690.
Today’s PMI figures will therefore offer a useful domestic test. Manufacturing is expected to ease to around 51.5 from 51.9, services to 51.8 from 52.1 and the composite index to around 51.6 from 52.2. All three would remain consistent with economic expansion, but a larger-than-expected slowdown could strengthen the argument that sterling’s recent advance has moved ahead of the fundamentals.
EUR: Dollar weakness carries the euro towards 1.17
EUR/USD has been another major beneficiary of this week’s shift in dollar sentiment, rising around 1% since Monday and briefly reaching a 14-week high. The pair is trading close to 1.17 despite relatively limited movement in euro-US interest-rate differentials, underlining the extent to which the advance has been generated by the dollar side of the equation.
Positioning has nevertheless become more constructive. EUR/USD risk reversals have moved positive across maturities for the first time since before the latest Middle East escalation, suggesting investors are increasingly willing to pay for protection against further euro appreciation. The change partly reflects concern that US rate expectations could soften further before September, particularly if Federal Reserve Chair Kevin Warsh fails to deliver a sufficiently hawkish message at Jackson Hole next week.
There is still reason for caution around the 1.17-1.18 area. Convera argues that a sustained move towards 1.18 requires a clearer catalyst, particularly because the recent euro rally has occurred without a meaningful improvement in relative rate spreads. Higher oil prices are also a more significant economic headwind for the eurozone than for the US, with Brent above $90 and still more than 5% higher this week.
Today’s flash PMIs provide the immediate test. Eurozone manufacturing is expected at approximately 51.8 from 51.9, services at 51.5 from 51.7 and the composite index around 51.7 from 52.0. Those readings would point towards continued but moderate expansion. A stronger outcome would give the euro a domestic justification for holding above 1.16 and potentially testing 1.18, while disappointing figures would increase the risk that the recent rally stalls once the dollar’s current bout of weakness loses momentum.
Looking ahead
Eurozone PMIs — Friday: Manufacturing is forecast around 51.8 from 51.9, services at 51.5 from 51.7 and the composite index close to 51.7 from 52.0. A stronger release would help validate EUR/USD’s move towards 1.17 rather than leaving the advance entirely dependent on dollar weakness.
UK PMIs — Friday: Manufacturing is expected around 51.5 from 51.9, services at 51.8 from 52.1 and the composite index near 51.6 from 52.2. A downside surprise would reinforce this morning’s softer retail sales figures and could limit further sterling gains.
US PMIs — Friday: Manufacturing is forecast close to 54.0 from 53.9, while services are expected to slow to 53.9 from 54.6. The US economy should therefore remain comfortably in expansion territory, but the dollar’s response will reveal whether markets are ready to return their attention to economic fundamentals.
US PCE inflation — Wednesday: July core PCE is currently expected to rise around 0.3% month-on-month, compared with 0.1% previously. As the Federal Reserve’s preferred underlying inflation measure, a stronger print would test the recent reduction in expectations for additional tightening and could provide the dollar with a more durable source of support.
Jackson Hole — 27-29 August: Federal Reserve Chair Kevin Warsh’s first Jackson Hole address will be the main policy event next week. Markets will be looking for greater clarity around the Fed’s reaction function after his decision to reduce forward guidance, particularly with inflation still above target and long-term Treasury yields elevated.
Treasury yields and oil: The US 10-year yield around 4.71%, the 30-year near 5.25% and Brent crude around $93 remain important cross-market indicators. Further gains in long-term yields without a corresponding dollar recovery would reinforce the view that fiscal and policy concerns are increasingly overriding traditional interest-rate support for the currency.