Quick overview
- The dollar remains strong, buoyed by the Fed’s hawkish stance, with expectations of two more rate hikes ahead.
- The yen weakened despite a recent rate hike by the Bank of Japan, reflecting ongoing challenges for the currency.
- The euro and sterling are struggling amid political uncertainties and recent losses, with little immediate support expected.
- Geopolitical tensions and upcoming talks between Trump and Xi Jinping on trade may influence market dynamics later in the week.
The dollar started the week on steady footing, the index holding just above 100.00 after climbing more than 1% through last week. The Fed’s hawkish tone from Wednesday’s meeting is still doing the heavy lifting, and nothing on Monday’s calendar looks likely to change the direction before Fed officials start making the rounds with speeches later in the day. Chicago Fed National Activity Index data for August is due, but it’s a second-tier release that rarely moves markets on its own.
Nordea put the macro picture plainly in a note out Monday. The US economy is still running hot, labor is holding up, and inflation isn’t showing meaningful signs of cooling. Their call is two more rate hikes, with risks tilted toward even more tightening if price pressures don’t ease. That’s the kind of backdrop that keeps the dollar bid and makes it hard for other central banks to compete.
The yen is the most striking story in G10 right now. USD/JPY touched its highest level in two weeks above 158.00 on Friday, and that happened the same day the Bank of Japan raised rates by 25 basis points to 1.25%, the highest they’ve been in over three decades. A rate hike that sends your currency weaker says everything about how far the BoJ still is from being genuinely hawkish. The vote was 7 to 2, and Governor Ueda’s guidance gave markets very little to work with on timing for what comes next. OCBC noted the dissents and the vague forward guidance as the reason the yen sold off. Japan is also out for holidays Monday through Wednesday, which means thin liquidity could push moves further in either direction than they normally would.
EUR/USD is parked below 1.1500 after last week’s losses. ECB President Christine Lagarde is speaking at an event in Frankfurt later Monday, though the remarks are tied to a roundtable launch rather than a policy setting, so the bar for anything market-moving is low. Germany’s political situation continues to weigh on the euro separately, with coalition uncertainty adding noise to an already difficult picture for the single currency.
Sterling is also struggling, sitting below 1.3400 after a week that went badly for GBP across the board.
Gold slipped to around $4,350 Monday morning after posting modest gains last week. The dollar’s renewed strength after the Fed is the main drag, though geopolitical risk from the Middle East has been providing a floor. The IRGC warned over the weekend that any fresh US military action could trigger a response in a different geography and with different weapons, keeping tension elevated even as diplomatic channels stay open.
Later in the week, Trump and Chinese President Xi Jinping are scheduled to meet on trade. ABN Amro analysts described the early tone around the engagement as more constructive than expected, pointing to talks that touched on trade, investment, the Iran conflict, and early signs of a possible US-China dialogue on AI risk. That last item, if it develops into anything real, would be one of the more consequential developments of the year.
Sophia Cruz
Financial Writer – Asian & European Desks
Sophia is an experienced writer, reporter and newsdesk member, mostly on the financial sectors. For the past 5 years Sophia has covered a wide variety of topics such as the financial markets, economics, technology, fin-tech and trading. Sophia has been a part of the FX Leaders team since 2017 and works on producing valuable content and information for traders of all levels of experience.
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