FX risk appetite builds as yields fall
Market overview
FX markets remain relatively calm as lower US Treasury yields, easing oil prices and improving risk sentiment reduce demand for defensive positioning. Longer-dated US yields have fallen around 10 to 15 basis points over the past week, helped by expanded Treasury buybacks and an 8% pullback in oil prices as markets monitor signs of potential Middle East de-escalation. Lower rates volatility has also filtered through to currencies and equities, keeping carry trades attractive. The Australian dollar was one of the stronger performers overnight after hotter-than-expected inflation increased expectations that the Reserve Bank of Australia could tighten policy again in November. Attention now turns to US inflation data, Treasury supply and Friday's Jackson Hole speech from Fed Chair Kevin Warsh.
USD: Inflation data takes centre stage
The dollar is trading cautiously ahead of July's US PCE inflation figures, with core PCE expected to remain firm on an annual basis. A softer monthly reading around 0.2% would likely reinforce the recent decline in Treasury yields and could leave the dollar vulnerable to modest further losses, particularly while broader risk sentiment remains constructive.
Treasury Secretary Scott Bessent's decision to increase bond buyback operations has helped ease pressure at the long end of the curve, although the market will face another test from the upcoming $44 billion seven-year Treasury auction. For the DXY, the 99.00 to 99.10 region could provide resistance, with a move back towards 98.60 possible if inflation does not surprise to the upside.
GBP: Sterling faces valuation and fiscal questions
Sterling has slipped towards 1.3625 against the dollar as traders reduce exposure ahead of the US inflation release, although expectations for tighter Bank of England policy continue to offer some underlying support. Better-than-expected UK economic data has strengthened the case for at least one further 25 basis point rate increase this year.
The picture against the euro looks less supportive. Consensus forecasts from major financial institutions suggest sterling remains relatively expensive, with EUR/GBP expected to move higher into year-end and through 2027. Domestic fiscal concerns also remain in focus ahead of the autumn statement, while the Bank of England continues to monitor the inflationary impact of volatile global energy markets.
EUR: Growth resilience supports the single currency
Eurozone economic data continues to outperform expectations, with activity proving more resilient than many had anticipated despite higher energy costs. ECB Executive Board member Isabel Schnabel has suggested that policymakers may need to acknowledge stronger growth risks at the September meeting, reinforcing expectations for another 25 basis point rate increase.
Improving growth prospects and a relatively firm interest-rate outlook remain supportive for the euro. Provided US inflation does not deliver a significant upside surprise, EUR/USD could continue to find support around 1.1650 to 1.1660, with 1.1700 to 1.1710 the next area of interest on the upside.
Looking ahead
US PCE inflation: Today's key release, with markets focused on whether underlying price pressures remain persistent.
US Treasury auction: Tomorrow's $44 billion seven-year note sale will provide another test of demand for US government debt.
Jackson Hole: Fed Chair Kevin Warsh speaks on Friday, with investors looking for guidance on the US rate outlook.
Middle East developments: Further signs of de-escalation could continue to weigh on oil prices and support broader risk appetite.
UK fiscal outlook: Attention remains on the October autumn statement and the potential implications for sterling.