Weekly Market Overview: USD Edges Higher Amid Key Developments

US Dollar Performance and Market Sentiment

The US dollar is starting the week on a subdued yet firmer footing across most G10 currencies, led notably by gains against the British pound. Sterling is pressing against the $1.36 resistance level that has constrained its upside over recent months. Meanwhile, the majority of emerging market currencies also exhibit strength, with the Mexican peso reaching its highest level this year as the greenback trades near MXN18.40.

An appellate court decision regarding President Trump’s request to reinstate the firing of Federal Reserve Governor Cook is expected today. This ruling precedes the highly anticipated Federal Open Market Committee (FOMC) meeting tomorrow, where markets widely anticipate a 25 basis point rate cut—the first reduction this year.

Equity markets display broad gains, although some Asia-Pacific markets such as Taiwan, Australia, and India post declines. Europe’s Stoxx 600 has rebounded from minor pre-weekend losses, while US equity futures show a mixed but largely unchanged profile. In fixed income, European 10-year government bond yields have softened by 2-3 basis points. French bonds underperform slightly following Fitch’s downgrade over the weekend. Conversely, Spanish and Portuguese bonds benefit from recent rating upgrades, with Italian yields also declining significantly.

The 10-year US Treasury yield remains steady around 4.06%, after briefly dipping below 4% last week. Gold prices continue to consolidate after setting a record high near $3,675 last Tuesday. October West Texas Intermediate (WTI) crude oil has also stabilized, trading in a narrower band around $62.50 to $63.25 after last week’s broader volatility.

US Dollar Index Dynamics

The US Dollar Index (DXY) is confined to a tight 20-tick range slightly above 97.50. Aside from a couple of exceptions last week, it has remained largely within the range established on September 5 following the August employment report (~97.45 to 98.25). Since Federal Reserve Chair Powell’s Jackson Hole address on August 22, DXY has been tracing a downward channel between approximately 97.15 and 98.45, declining modestly by about 10 ticks over the course of the week.

This week’s economic calendar begins slowly, with only the September New York State manufacturing survey on today’s docket. Key releases, including August retail sales and industrial production, arrive tomorrow ahead of Wednesday’s FOMC meeting. Additionally, today marks the deadline for a federal appeals court ruling on President Trump’s petition related to the dismissal of Fed Governor Cook. Tax payment deadlines are also exerting technical pressures across segments of the money markets amid settlements from recent auctions.

Eurozone Highlights

The euro remains contained within a narrow range, holding near last Thursday and Friday’s highs just below $1.1750. Since the September 5 US employment report, the euro has oscillated between roughly $1.1650 and $1.1760. Implied volatility for the euro remains relatively subdued, at below 7% for a three-month horizon and about 6.5% for one month, consistent with market expectations ahead of potentially larger moves.

Credit rating adjustments saw Fitch downgrade France from AA- to A+, upgrade Portugal from A- to A, and S&P lift Spain to A+. Market response has been muted. Eurozone trade figures for July revealed a seasonally adjusted surplus of €5.3 billion—less than half the Bloomberg survey median but slightly above June’s €3.7 billion. The report holds limited immediate market sensitivity. Notably, the H1 2025 trade surplus declined approximately 8.5% year-over-year.

Tomorrow’s German ZEW survey is expected; however, eurozone monetary policy is largely out of focus following last week’s European Central Bank (ECB) meeting. Attention now shifts to five other G10 central bank decisions upcoming in the week. The US-German two-year yield spread remains a key metric, narrowing to 155 basis points—the narrowest US premium since September last year and down over 25 basis points since Powell’s late August speech.

Chinese Yuan and Domestic Data

The US dollar has depreciated approximately 1.5% against the offshore Chinese yuan from early May to late July, with a further decline of nearly 1.0% since August 1. On Thursday, the greenback fell to its lowest level of the year near CNH7.1120. The People’s Bank of China (PBOC) continues to manage dollar-yuan rates through its daily reference rate mechanism, which was modestly increased today to CNY7.1056 from CNY7.1019 over the weekend.

August’s Chinese macroeconomic data released today illustrate continued weakness in the property sector, with declines in both new and existing home prices. Retail sales and industrial production growth year-to-date have softened. Fixed asset investment eased to 0.5% year-over-year—the slowest pace since the pandemic—consistent with government efforts to curb excessive property market investment. Additionally, despite continuing US-China trade negotiations, Beijing recently launched two investigations into US semiconductor companies and preliminarily found Nvidia violated antitrust law in connection with its 2020 acquisition of Mellanox Technologies.

Japanese Yen and BOJ Outlook

Ahead of the weekend, the US dollar traded within the prior session’s range against the Japanese yen, supported by firmer US Treasury yields. The dollar remains inside last Thursday’s band between JPY147.00 and JPY148.20. Japan’s data calendar is quiet until midweek, when the July tertiary industry index and August trade balance are scheduled.

The Bank of Japan (BOJ) meeting on Thursday and Friday represents the week’s key event. While no policy shifts are expected, Governor Ueda’s forward guidance will attract scrutiny. The BOJ is anticipated to maintain its accommodative stance, likely reaffirming that any rate hikes will depend on economic developments aligning with current projections.

British Pound Developments

Sterling is testing the $1.3600 resistance, a barrier not breached for over two months. It has previously rebounded three times upon reaching this level. A successful breakout could open the door toward $1.3635. The pound gained support last Thursday just below $1.3500, near its 20-day moving average.

The UK calendar features critical releases including Thursday’s employment report, Wednesday’s Consumer Price Index (CPI), and Thursday’s Bank of England (BoE) policy meeting. The BoE is widely expected to maintain current rates at least until early 2026, shifting focus towards scaling back net gilt sales rather than rate adjustments.

Canadian Dollar Pressures

The US dollar has advanced versus the Canadian dollar in eight of the past ten sessions, leaving the loonie as the weakest G10 currency against the greenback in the first half of September, down roughly 0.75%. The Canadian dollar is consolidating above last Thursday’s technical low near CAD1.3825, where the 20-day moving average also resides.

Over the weekend, Canadian Prime Minister Carney announced a C$13 billion fund aimed at increasing affordable housing. Today’s housing, manufacturing, and wholesale sales data typically exert minimal market influence. The August CPI release and Bank of Canada (BoC) meeting are scheduled for tomorrow and Wednesday, respectively. The BoC is expected to lower its overnight rate target to 2.50% from 2.75% shortly before the FOMC announcement.

Australian Dollar Strength and Outlook

The Australian dollar was the best-performing currency globally last week, gaining roughly 3.5% versus the US dollar and reaching a new yearly peak near $0.6670. It remains firm today though no further gains have been recorded. The sole major economic release this week is the August jobs report on Thursday.

While overall economic growth is slowing, full-time employment has averaged a 21,000 monthly increase over the past three months compared to approximately 7,000 per month previously. The labor market’s resilience coupled with stronger consumption has led to a cautiously optimistic Reserve Bank of Australia (RBA) outlook. Futures markets imply a year-end rate increase of over 30 basis points since early July, with about half of that adjustment occurring since mid-August.

Mexican Peso and Emerging Market Currencies

Mexico’s economic calendar is relatively light this week. The peso reached a new annual high late last week, primarily driven by a weaker US dollar and declining US interest rates. Similar dynamics supported currency gains in Brazil and Colombia, both also marking yearly highs.

Despite recent underperformance in Mexico’s July industrial production (-1.2% versus a Bloomberg median forecast of -0.2%), the peso has edged slightly higher today. Even if Mexico opts to reduce rates later this month, the interest rate differential remains favorable for foreign investors.

Over the past six weeks, the US dollar has traded in a range roughly between MXN18.51 and MXN19.00, mostly below MXN18.80. It broke below this band last week, falling to nearly MXN18.44 before edging to about MXN18.4150 today. Technical analysis suggests a near-term target near MXN18.40, with potential movement toward MXN18.18 anticipated in Q4.

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**Disclaimer:** This overview is provided for informational purposes and does not constitute investment advice.