The dollar reached an 18-month high last week, supported by a global surge in government bond yields tied to the energy shock from the Middle East. A weak US jobs report cooled bets on another Federal Reserve rate rise, yet failed to dent the dollar’s strength.
The euro came under the most pressure, falling for a fourth consecutive week as French borrowing costs soared relative to Germany. Sterling sits in the middle, weaker against the dollar but firmer against the euro, with markets leaning towards a Bank of England rate rise in November.
Weak US jobs data cools Fed rate bets, but the dollar holds its ground
US payrolls rose by just 29,000 in September against expectations of around 90,000, and revisions removed a further 60,000 jobs from the previous two months, while unemployment edged up to 4.2%. Alongside a softer than expected August reading on the Fed’s preferred PCE inflation measure, with headline inflation at 3.4% against forecasts of 3.7%, the data cut the market probability of an October rate rise from around 70% a week earlier to roughly 20%. The dollar nonetheless held firm, as bond yields across the US, UK and Europe sit at multi-decade highs. The minutes of the Fed’s September meeting, due on Wednesday, will show the debate behind its unanimous decision to raise rates, although they pre-date the latest data.
French bond stress weighs on the euro despite rising inflation
The euro fell for a fourth consecutive week against the dollar, to its weakest level in more than a year. The pressure came from France, where the gap between French and German 10-year borrowing costs widened to around 1.4 percentage points, the widest since the 2012 euro area debt crisis, on budget and political concerns. Unlike the US, France cannot rely on its own central bank, although the European Central Bank has a bond-buying backstop that analysts expect to be used only if market moves become disorderly. Euro area inflation rose to 3.8% in September, its highest since 2023 and ahead of the 3.6% expected, strengthening the case for another ECB rate rise at its 29 October meeting. Thursday’s account of the ECB’s September meeting will show how policymakers weigh that against fragmentation risks.
Sterling splits: weaker against the dollar, firmer against the euro
The pound fell to a three-month low against the dollar during the week before recovering some ground after the US jobs data, while against the euro it climbed to around a ten-week high, helped more by euro weakness than UK strength. At home, Governor Andrew Bailey and MPC members Sarah Breeden and Clare Lombardelli have signalled growing openness to raising rates if energy prices stay high, although Alan Taylor has played down the need for rapid tightening. Markets now price roughly an 80% chance of a hike on 5 November, with around four increases over the next year. Ten-year gilt yields have risen above 5%, their highest since 2007, narrowing the room for manoeuvre ahead of the Chancellor’s 28 October Budget. A modest positive came from second-quarter GDP, revised up to 0.5% growth from 0.4%.
The week ahead:
- US ISM services PMI (September) – 05/10 – GBPUSD, EURUSD
- Eurozone retail sales (August) – 06/10 – GBPEUR, EURUSD
- US Federal Reserve meeting minutes – 07/10 – GBPUSD, EURUSD
- ECB account of September meeting – 08/10 – GBPEUR, EURUSD
- BoE Governor Bailey and chief economist Pill speak – 08/10 – GBPUSD, GBPEUR
With bond markets volatile and central bank expectations shifting quickly, it is worth speaking with your currency specialist about how these moves could affect any transfers you have planned in the coming weeks.
