Dollar Extends Its Advantage

USD

The dollar strengthened further on Wednesday as September’s flash PMI surveys reinforced the theme of US economic resilience. Activity accelerated across both the manufacturing and services sectors, with the composite PMI rising to its highest level in more than five years. Stronger hiring and renewed signs of rising input costs added to evidence that inflation pressures remain elevated even as economic growth continues to outperform most developed-market peers.

The data are consistent with the themes outlined in our recent Week Ahead outlook, namely that the dollar continues to benefit from a combination of robust domestic activity, relatively attractive yields and heightened geopolitical uncertainty. Markets will continue to assess whether the Federal Reserve may need to tighten policy again before year-end, with an October move remaining a realistic possibility rather than a foregone conclusion.

Attention today turns to weekly jobless claims, the second-quarter current account balance and August new-home sales. However, developments in the Middle East are likely to remain just as influential. Ongoing hostilities continue to create uncertainty around energy markets and global trade routes, supporting safe-haven demand and helping to underpin the dollar.

EUR

The euro came under pressure on Wednesday despite an encouraging set of euro area PMI figures. EUR/USD fell around 0.6% as markets focused on the relative strength of the US data rather than the improvement in European activity. The eurozone composite PMI rose to its highest level in almost three-and-a-half years, reflecting stronger momentum across both manufacturing and services and a more broad-based expansion across the region.

While the data suggest that the euro area economy is proving more resilient than many had anticipated, the improvement was accompanied by an acceleration in input and output price pressures. Businesses cited rising energy and transportation costs, underlining the continued impact of Middle East hostilities on the region’s inflation outlook.

Today’s German ifo survey will provide another important measure of business confidence and should help determine whether the recovery signalled by the PMI data is feeding through into broader sentiment indicators. Policy decisions from the SNB, Riksbank and Norges Bank may also generate regional volatility. For now, however, the euro remains constrained by a backdrop of US economic outperformance and a dollar that continues to attract both cyclical and safe-haven demand.

GBP

Sterling weakened sharply against the dollar on Wednesday, with GBP/USD falling approximately 0.8% after softer-than-expected UK PMI data highlighted an increasingly uncomfortable combination of slowing growth and rising cost pressures. The survey showed services activity losing momentum and overall private-sector growth easing to a three-month low.

At the same time, businesses reported rising energy, fuel and raw-material costs, reinforcing concerns that inflation could remain elevated for longer than policymakers would like. The data underline the difficult balancing act facing the Bank of England. Economic momentum remains subdued, yet external price pressures linked to higher energy costs continue to limit the scope for a more dovish policy stance.

Our view remains that Bank Rate is likely to remain unchanged through year-end despite the increasingly hawkish tone adopted by policymakers following last week’s 6-3 vote to leave rates at 3.75%. Nevertheless, a prolonged escalation in the Middle East and a further rise in energy costs would challenge that outlook. With the domestic calendar relatively light today, sterling is likely to remain driven by broader dollar moves, gilt-market dynamics and any further guidance from MPC members.

CAD

The Canadian dollar weakened further on Wednesday, with USD/CAD rising by around 0.3% despite a sharp rebound in crude oil prices. Brent crude rose 3.9% to close above $103 per barrel, snapping a five-session losing streak amid renewed concerns over global energy supplies. Under normal circumstances, stronger oil prices would have offered support to the commodity-linked loonie.

Instead, broad-based US dollar strength dominated trading following the exceptionally strong US PMI release. The resulting divergence between US and Canadian growth expectations continued to favour the greenback, leaving CAD unable to benefit fully from the recovery in crude prices.

Focus now turns to July retail sales data. Markets will be looking for evidence of whether elevated borrowing costs are beginning to weigh more heavily on household spending. A softer-than-expected release would reinforce concerns about domestic demand and leave the currency increasingly dependent on support from energy markets. Looking ahead, developments in the Middle East remain a key risk factor. Further escalation would likely support oil prices, but could also trigger renewed demand for the US dollar, creating a challenging environment for CAD despite its close relationship with the energy sector.

This content was originally published by our partners at Monex Canada.