Markets watch Trump-Xi meeting as dollar reaches fresh highs

Market overview

The Trump-Xi meeting in Washington has added another major geopolitical layer to an already volatile week for FX markets. President Donald Trump hosted Chinese President Xi Jinping at the White House on Thursday, with trade, artificial intelligence and Taiwan among the key issues under discussion during Xi’s first White House visit in more than a decade. Expectations for a major breakthrough remain measured, with deep-rooted economic and strategic differences still separating the two sides.

Beyond Washington, the broader market picture remains firmly defensive. A global bond sell-off, stronger US data and renewed expectations for further central-bank tightening have driven demand for the dollar, while sterling and the euro have slipped towards multi-month lows. Oil is another key pressure point, with Brent still above $105 a barrel as markets balance tentative US-Iran negotiations against continued risks to energy supply. For businesses with upcoming currency requirements, the sharp moves across FX are creating increasingly important levels to watch.

USD: Dollar extends its advantage

The dollar is on course for a second consecutive weekly gain, with the dollar index up more than 1% this week and trading close to a two-month high. EUR/USD has fallen towards $1.1370, while GBP/USD is trading around $1.3220 as the greenback continues to outperform across the major currencies.

The latest move has been driven by a combination of resilient US economic data, higher Treasury yields and growing expectations that the Federal Reserve may need to tighten policy again. Strong PMI figures reignited inflation concerns, while further selling in US Treasuries pushed yields sharply higher and reinforced the dollar’s rate advantage.

The move is beginning to look stretched over the very short term, which could encourage some consolidation around current levels. However, with US yields elevated and geopolitical risks still supporting defensive demand, the dollar remains well supported unless incoming data gives markets a reason to rethink the Fed outlook.

GBP: Sterling loses momentum

Sterling has endured a difficult week, with GBP/USD falling towards $1.3220, its weakest level in around three months and its poorest weekly performance in four months. Dollar strength has been the dominant external driver, but the domestic picture has offered little support for the pound.

September’s UK composite PMI fell to 51.7 from 52.5 in August, below expectations and the weakest reading for three months. While activity remains in expansion territory, the survey also pointed to rising cost pressures, leaving the Bank of England facing an uncomfortable combination of slower growth and persistent inflation risks.

The near-term outlook therefore remains challenging. Higher energy prices, softer economic momentum and a strong dollar backdrop could continue to limit sterling’s recovery, particularly if markets maintain aggressive expectations for further UK rate increases while the economy loses pace.

EUR: Better data fails to lift the euro

The euro has also struggled against the stronger dollar, with EUR/USD falling to around $1.1370, its lowest level in roughly two months. The move has been driven primarily by the repricing of US interest-rate expectations rather than a significant deterioration in the eurozone outlook.

In fact, the latest German data has been encouraging. The Ifo business climate index rose to 89.9 in September from 88.8, while both current conditions and expectations improved. The Ifo Institute said German business sentiment had strengthened and that the economy was continuing its recovery.

For now, however, improving European data has been overshadowed by the widening focus on US yields and the Fed. Until that changes, EUR/USD is likely to remain sensitive to shifts in US rate expectations, with the $1.14 area an important near-term reference point.

Looking ahead

• Trump-Xi talks: Markets will continue to assess whether the Washington meetings produce tangible progress on trade, technology or wider US-China relations.

• Federal Reserve: Further comments from Fed officials and incoming US data will be crucial in determining whether expectations for another rate increase continue to build.

• US labour market: Next week’s jobs data will be an important test of the strength of the US economy and the sustainability of the dollar rally.

• Oil and the Middle East: Brent remains above $105, keeping inflation risks elevated despite reports that the US and Iran are exploring a phased agreement involving the Strait of Hormuz.

• GBP and EUR: Sterling remains vulnerable to softer UK activity, while the euro will look to stronger European data for support against a still-dominant dollar.