Market Overview: Dollar Rally Pauses Amid Mixed Global Data

Currency Markets: Dollar Faces Resistance, Krona Leads G10 Gains

The U.S. dollar’s rally, which began during last week’s Federal Reserve press conference, lost momentum yesterday and is mostly softer today. Despite Sweden’s unexpected quarter-point rate cut, the Swedish krona is outperforming other G10 currencies. Flash PMI data for September showed a general softening across major economies, yet the market impact has been limited so far. Attention is focused on Federal Reserve Chair Powell’s scheduled remarks shortly after noon ET, which could act as a fresh catalyst for currency moves.

Technically, the dollar has retraced much of last week’s recovery and faces mixed pressure against emerging market currencies; central European currencies generally display strength relative to those from the Asia Pacific region. Tokyo markets were closed for a national holiday, while most major Asian markets, excluding China and Hong Kong, advanced—Taiwan posted a notable 1.4% gain. European equities follow suit with the Stoxx 600 rising over 0.5%, recovering losses from the previous two sessions. U.S. index futures remain largely unchanged.

Fixed Income and Commodities

Government bonds are broadly firmer, with benchmark 10-year yields edging lower. The UK 10-year Gilt yield declined a couple of basis points, paralleling the U.S. Treasury 10-year yield which eased by two basis points to approximately 4.13%. Gold extended its rally to $1,791 during European trading but is pulling back ahead of the North American session, with initial support possibly near $1,760. Meanwhile, November WTI crude oil is consolidating quietly in a $61.85 to $62.60 trading range.

U.S. Dollar Dynamics and Political Developments

Following a roughly 1.65% advance after last week’s FOMC statement, the Dollar Index paused and consolidated near 97.30 yesterday, edging slightly lower to around 97.20 today. The 97.00 level corresponds closely with the 50% retracement of the recent post-Fed rally. A move above 97.60 would help stabilize the dollar’s technical outlook.

On the domestic front, the prospect of a government shutdown is increasing as bipartisan efforts to pass a short-term funding extension have stalled. Both the Senate and House are currently on recess, intensifying uncertainty ahead of a critical deadline at the month’s end. The preliminary September PMI data also pose potential headline risk, with expectations of a second consecutive monthly slowdown in composite output. Prior to Chair Powell’s noon speech, Federal Reserve officials Governor Michelle Bowman and Atlanta Fed President Raphael Bostic are scheduled to discuss economic developments.

Regional Currency and Economic Updates

Eurozone

The euro briefly traded above $1.1800 late yesterday in North American hours, corresponding to a 38.2% retracement of a pullback that bottomed near $1.1725 earlier. Price action formed a bullish outside up day — trading both sides of Friday’s range and closing above it. After peaking near $1.1820, the euro retraced to $1.1780 post-PMI release before recovering above $1.1800 again. Further retracement targets lie around $1.1825 and $1.1845.

The flash September PMI showed a mixed picture: manufacturing slipped back into contraction territory (49.5 from 50.7), while services strengthened (51.4 vs. 50.5), lifting the composite slightly to 51.2 from 51.0. The composite output had averaged 50.4 in both Q1 and Q2. German manufacturing saw a minor slowdown, although services expanded, pushing the composite higher to 52.4 from 50.5. Conversely, French manufacturing and services weakened, with the composite index falling to 48.4 from 49.8.

Sweden’s Riksbank surprised markets with a 25 basis point rate cut, lowering key rates to 1.75%. This represents Sweden’s third reduction this year, following cumulative cuts of 150 basis points in the previous year. Headline inflation currently stands at 1.1%. The krona strengthened against the dollar but softened modestly versus the euro.

China and the Yuan

The U.S. dollar traded in a narrow range against the Chinese yuan yesterday, confined to last Friday’s band between CNH7.1060 and CNH7.1200, and remained steady within CNH7.1130 to CNH7.1190 today. The 20-day moving average lies near CNH7.1250, a level the greenback has not closed above for over a month. Ahead of China’s national holiday in early October, the People’s Bank of China is injecting liquidity into the banking system. The dollar’s daily fixing was lowered to CNY7.1057 from 7.1106 the previous day.

Japan and the Yen

The dollar maintained its position near the upper bound of last week’s range, touching almost JPY148.30 before easing to around JPY147.65 in North American trading. The exchange rate currently rests just below a downtrend line drawn from the August 1 and September 3 peaks, positioned slightly above JPY148.00. The 5- and 20-day moving averages converge near JPY147.50, which has acted as support in recent sessions. Japanese markets were closed for the equinox holiday. The preliminary Japan PMI will be released tomorrow, while the LDP party leadership contest continues, with a vote scheduled for October 4.

United Kingdom and Sterling

The British pound has underperformed, declining nearly 2% from mid-last week’s highs. After briefly dipping below $1.3455, buyers stepped in, pushing sterling back above $1.3520. Today, sterling edged slightly higher but remains capped near the 20-day moving average at approximately $1.3525, with resistance expected around $1.3550-$1.3560.

The UK flash September PMI softened, with manufacturing remaining in contraction territory at 46.2 (down from 47.0), and services slowing to 51.9 from 54.2. The composite index decreased to 51.0 from August’s 53.5—the highest since April 2024. The composite averaged 50.9, 50.3, and 52.0 in Q1, Q2, and Q3 respectively. Growth expectations for the current quarter have moderated to 0.2% from 0.3%, based on Bloomberg survey medians.

Canada and the Canadian Dollar

The dollar firmed against the Canadian dollar yesterday, surpassing last Friday’s high near CAD1.3825 and approaching resistance in the CAD1.3850 region. It remains contained below CAD1.3865 today. A break above this level could prompt a retest of the CAD1.3900 area.

Bank of Canada Governor Tiff Macklem is scheduled to speak on trade and capital flows at 2:30 PM ET today. Economic data flow remains light ahead of Friday’s July GDP release. The Canadian economy contracted at a -0.1% monthly pace over the past three months and shrank at a 1.6% annualized rate in Q2, hampered chiefly by weakening exports to the U.S.

Fixed income markets price in a likelihood of an additional rate cut in Q4, expected to lower the policy rate to 2.25%. The market attributes about a 40% probability to a further cut in early 2024.

Australia and the Australian Dollar

The Australian dollar briefly traded above $0.6600 yesterday but mostly held within a narrow $0.6580 to $0.6600 range. It is now hovering near the $0.6600 level, with resistance anticipated around the $0.6615 to $0.6625 zone.

Australia’s preliminary September PMI softened slightly, though manufacturing remains above the expansion threshold at 51.6 (down from 53.0 in August). The composite PMI averaged 51.0 in Q1 and 51.1 in Q2; a confirmed September reading of 52.1 would lift the Q3 average to approximately 53.8.

Reserve Bank of Australia Governor Philip Lowe has indicated that the conditions required for a rate cut are substantial. Markets currently assign negligible probability to a cut at next week’s meeting and around an 80% chance of a reduction in November.

Mexico and the Mexican Peso

The U.S. dollar consolidated near the upper end of last week’s range against the Mexican peso in subdued conditions yesterday, briefly slipping through a support level near MXN18.34. Immediate support is identified around MXN18.30.

Mexico will release July retail sales figures today, expected to show a slight rebound following a 0.4% decline in June. The monthly IGAE economic activity index, akin to a monthly GDP gauge, is forecast to decline by 0.45% after a 0.22% increase in June. Ahead of Thursday’s Banxico meeting, September CPI data for the first half of the month will be published on Wednesday. Although inflation is projected to remain firm, the central bank is primarily growth-focused and is widely expected to cut rates by 25 basis points to 7.50%, barring any significant shocks. This would mark the first easing move following a restrictive policy stance.

Summary

Markets remain cautiously poised ahead of key central bank speeches and important economic releases. The dollar’s recent rally has paused amid mixed data and prospective fiscal uncertainty. Regional currencies exhibit differentiated trajectories influenced by localized economic conditions and monetary policy stances. Focus now turns to Federal Reserve Chair Powell’s speech and developments in U.S. fiscal negotiations, while PMIs continue to provide insights into the global growth outlook.