Dollar extends gains as yields climb
Market overview
The dollar strengthened across the board on Wednesday as firmer US data pushed Treasury yields higher and weighed on risk appetite. Sterling, the euro and the Australian dollar all lost ground, while USD/JPY continued to rise as global bond markets came under pressure.
The broader FX picture remains driven by shifting rate expectations and growth differentials. The US continues to outperform, but dollar gains are becoming increasingly stretched, while weaker UK data, resilient eurozone activity and China-related risks are creating greater divergence across the major currencies.
USD: Strong data keeps the Fed in focus
The dollar rose to its highest level since late July after the S&P Global flash US composite PMI climbed to 58.4 in September, its strongest reading in more than five years.
The data reinforced expectations that the Federal Reserve may need to tighten further, with markets now pricing more than a 50% chance of an October rate rise. US 10-year Treasury yields jumped from 4.96% to 5.11%, their highest level since 2007.
DXY broke above 101.0, supported by stronger data, higher yields and weaker risk sentiment. The move is beginning to look stretched, but further upside surprises in US data could keep the dollar supported. If those risks fade, a return towards 100.0 to 100.5 could come back into focus.
USD/JPY also remains important. The pair has continued higher following last week's dovish Bank of Japan surprise, increasing the risk of intervention if it moves closer to 160.0.
GBP: Softer UK data weighs on sterling
GBP/USD fell 0.8%, its largest one-day decline since June, taking the pair to a two-month low and bringing the 1.3200 area into focus.
UK composite PMI slipped to a three-month low of 51.7 in September, marking a notable downside surprise after a strong run of UK data. Labour demand also remains weak, while higher energy prices risk adding further pressure to household incomes.
Markets still price around 100 basis points of Bank of England tightening over the next 12 months, leaving sterling vulnerable if incoming data fail to support those expectations.
EUR: Dollar strength pushes EUR/USD lower
EUR/USD fell 0.6% and slipped below 1.1400 to its lowest level since late July, despite stronger-than-expected eurozone PMIs.
Services activity improved sharply and short-term rate differentials moved slightly in favour of the euro, suggesting the latest decline was largely driven by dollar strength rather than a deterioration in the eurozone outlook.
The break below 1.1400 leaves limited technical support until the June lows around 1.1325 to 1.1330. However, current rate differentials do not yet point to a sustained move lower, with the 1.1430 to 1.1450 area more consistent with the present macro backdrop.
Looking ahead
US-China talks: Markets will watch the meeting between President Trump and Xi Jinping for signs of further trade de-escalation.
US data: Stronger releases could push markets closer to fully pricing an October Fed hike.
USD/JPY: Intervention risk will remain in focus if the pair continues towards 160.0.
GBP: Softer UK activity data place greater scrutiny on current Bank of England pricing.
EUR: Traders will watch whether EUR/USD can stabilise above the June lows.
AUD and NZD: Both remain sensitive to China developments, yuan moves and broader risk sentiment.