USD: Waller softens the September case, payrolls restores it
The US dollar index fell 0.70% over the week ending 4 September to 98.98, having touched its lowest level since May on Thursday. The decline came almost entirely from one source, and Friday's employment report took back part of it. The currency ended the week lower against the yen, the Swiss franc and the Canadian dollar, and roughly unchanged against the euro.
Federal Reserve Governor Christopher Waller changed the week's direction on Thursday. He said recent inflation data had improved and that, if the incoming numbers continued to point the same way, he would be inclined to hold the federal funds rate at the 16 September meeting. That is a direct counterweight to Chair Kevin Warsh's Jackson Hole message the previous Friday, and markets treated it as one: the probability of a September increase fell to about 50% from 68% earlier in the week.
Friday's payrolls report reversed much of that. The Bureau of Labor Statistics said employers added 162,000 jobs in August against forecasts of roughly 55,000, with the unemployment rate steady at 4.1% and the June and July figures revised up by a combined 55,000. The two-year Treasury yield rose to about 4.39% and the ten-year to around 4.78%. September hike pricing returned to roughly 59% on the print before easing back, and the rates market finished the week pricing 13 basis points for 16 September and 57 basis points of increases through to June 2027.
The rest of the week's data pointed the other way, which is why Waller had material to work with. ADP private payrolls added just 38,000 in August against 47,000 expected, slowing from a revised 46,000. The ISM manufacturing index fell to 54.6 from 55.6, below the 55.2 expected but still in expansion, while the services measure rose to 55.4 from 54.1. Job openings came in at 7.271 million in July, slightly under consensus. A private payrolls series showing 38,000 and an official one showing 162,000 in the same month is the tension the September meeting now has to resolve.
Friday's consumer price index is the last significant data point before the 16 September meeting, and it arrives with the Federal Open Market Committee already in its blackout period, which began on 5 September. July's report had headline inflation at 3.4% and core at 2.5%, the softest core reading in five months. Consensus looks for core to rise 0.2% on the month, taking the annual rate to 2.4%, with headline at 3.5%.
The composition is what matters. Crude oil rose 10% over the week to $91.74, and August's basket will show whether energy is staying in the energy line or leaking into goods and services. A core print of 0.3% on the month would push September pricing well above the 13 basis points currently sitting there and support the dollar into the meeting; an in-line or softer core would validate Waller and leave the dollar dependent on Friday's payrolls strength alone, which is a thinner argument than it looked on the day.
Thursday's producer price index is the useful precursor, and Monday is a holiday in both the United States and Canada, so the week's liquidity is back-loaded.
EUR: three-year-high inflation makes Thursday's increase a formality
The euro traded near 1.1629 against the US dollar on Friday and finished the week ending 4 September close to where it started, slipping back below 1.16 after the American employment report. That is a weak result in context: the dollar index fell 0.70% over the same five sessions, so the single currency lost ground against the yen and the franc while making none against the greenback.
The inflation figures were the week's substance. Eurostat's flash estimate put euro area harmonised inflation at 3.3% in August, up from 2.9% in July and the highest reading since September 2023. Energy inflation jumped to 14.3% from 10.3%, reflecting the Middle East conflict and its effect on the oil price. Core inflation eased to 2.4% against the 2.5% expected, and services inflation, the measure the Governing Council watches most closely for persistence, fell to 3.0% from 3.3%.
Those two halves point in different directions, and the market has resolved them in favour of the headline. A 25 basis point increase to a 2.50% deposit rate on Thursday is fully priced, and a second increase is fully priced for December. President Lagarde told the July press conference that the full inflationary impact of the energy shock had yet to play out and that the Council was watching its intensity, duration and second-round effects. August's energy number is precisely the development that framing anticipated.
The activity side remains the weaker part of the case. Euro area unemployment held at 6.4% in July, slightly above the 6.3% expected, and growth continues at a modest pace with higher energy costs weighing on households and firms. A central bank raising rates into subdued growth supports a currency only while the growth side holds, and with core and services inflation both easing, the December increase is the one carrying the doubt.
Thursday's European Central Bank decision is the week's fixed point, and because the increase itself is fully priced, the euro will be set by the projections and the press conference rather than by the rate. Updated staff forecasts will show how much of the energy shock the Council expects to persist into 2027. Forecasts that carry higher inflation into next year, with Lagarde declining to describe the December increase as conditional, would confirm the pricing and support the currency; an emphasis on the softer core and services numbers, with the December move framed as data-dependent, would take the second increase out of the curve and leave the euro exposed.
Germany's final inflation reading arrives the same day and is unlikely to change the aggregate picture. Friday's US consumer price index is the other half of the exchange rate. With both central banks now expected to raise rates, the euro-dollar rate is being determined by which one moves first and how far, rather than by the direction of either on its own.
GBP: gilt yields at 2008 levels, and the pound falls anyway
Sterling fell to 1.3505 against the US dollar by Friday, down around half a per cent over the week ending 4 September and near a two-week low. The pound declined in a week when the dollar index fell 0.70%, which is the more telling fact. It was one of the weaker major currencies over the five sessions despite the largest move in UK bond yields in months.
The gilt market drove it. Ten-year yields printed 5.255% on Tuesday and reached 5.294% during the week, the highest since June 2008, while long-dated yields touched levels last seen in 1998. Yields eased back to 5.14% by Friday as oil prices came off their highs. Higher yields would ordinarily support a currency; here they reflected investor concern about the fiscal position ahead of the Autumn Budget, and a currency market pricing fiscal risk reads a rising yield as compensation demanded rather than return offered.
The monetary policy picture is separately firm. Markets now fully price a Bank of England increase by the end of 2026 and a further one by March 2027, a meaningful shift from the position two weeks earlier when the next move had been pushed into 2027 on cheaper oil. Brent's recovery, with WTI up 10% over the week to $91.74, reversed that logic and put UK headline inflation back on a rising path.
That leaves the Monetary Policy Committee raising rates into a soft labour market and an unresolved fiscal question at the same time, which is the least comfortable combination available to it. Rabobank set a 0.87 target for the euro against the pound on Budget risk during the week, and the cross rather than the dollar pair is where the fiscal story is being expressed most directly.
Friday brings the July activity data in one release: monthly GDP, industrial and manufacturing production, the goods trade balance and construction output. The monthly GDP figure is the one that matters, because the argument about the Committee's next move is now about whether the economy can absorb a higher policy rate rather than about whether inflation justifies one.
A firm monthly print would support the year-end increase now fully priced and give sterling something other than yields to stand on; a contraction would leave the market holding a rate increase priced into a weakening economy, and the pound would likely weaken against the euro before it weakens against the dollar.
The gilt market remains the more important variable and has no scheduled catalyst this week. Yields eased on Friday as oil fell back, and if that continues the fiscal premium in the pound should narrow. A renewed move above 5.25% on the ten-year would signal it has not.
JPY: Takata and Ueda do what intervention could not
The Japanese yen gained about 2.5% against the US dollar over the week ending 4 September, its strongest week since the joint Tokyo and Washington yen-buying operation in late July, and the best performance of any major currency. The exchange rate ranged from 160.38 on Tuesday to 155.28 at Thursday's low before settling around 156.23 on Friday. That is a five-yen range in three sessions, and no intervention was required to produce it.
Bank of Japan officials produced it instead. Board member Hajime Takata raised the possibility of outsized or back-to-back increases to contain inflationary pressure, and Governor Kazuo Ueda said policymakers need to pay greater attention to upside price risks in setting policy. Markets read the pair of comments as pointing to an increase at the meeting later this month. The move was amplified by the fact that traders were still weighing the chance of further official yen buying, which meant positioning was already thin on the short side.
The domestic data supported the case. Retail sales rose 4.0% on the year in July against forecasts of 3.0%, accelerating from a revised 0.6%, and preliminary industrial production rose 0.1% on the month where a 0.6% contraction had been expected. Consumption and output both running ahead of expectations is the combination the Board has said it needs before tightening further.
The move also carried beyond the dollar pair. A yen rising this quickly against a currency that most of the world is short against transmits into every other cross, and the week's broad dollar weakness owed as much to the yen as to Waller. Friday's American payrolls report checked the move without reversing it.
Tuesday brings the final reading of second-quarter GDP alongside the July current account. Revisions to a quarter already published rarely move the currency on their own, but this one lands with the market pricing a rate increase within weeks, and a downward revision would give the cautious side of the Board something to point to. An unrevised or firmer figure would leave the September case intact.
The larger question is whether the yen's move has run ahead of what the Board will actually deliver. Takata's reference to back-to-back increases is one member's framing, not policy, and Ueda has been careful before. If officials speaking this week repeat the upside-risk language, the currency should hold the bulk of last week's gain; if the message softens toward gradualism, the positioning that produced a five-yen range in three sessions can unwind at similar speed.
Friday's US consumer price index is the external variable, and it works on this pair through the rate differential more directly than through anything else.
CAD: oil lifts the currency, employment undercuts it
The Canadian dollar firmed over the week ending 4 September, with the US dollar down around 0.35% against it at 1.3806 by Friday. Almost all of that came from crude oil, which rose 10% over the five sessions to $91.74 on the Middle East conflict. The currency ended the week stronger despite a domestic employment report that was considerably worse than expected.
The Bank of Canada held its policy rate at 2.25% on Wednesday. The statement acknowledged a broadening recovery and increased inflation risks, which markets read as a mildly hawkish hold, while noting that tariffs and excess supply leave the outlook uncertain. That combination is unusual for a central bank in this cycle: a hold delivered with a warning attached rather than a reassurance.
Friday undid part of it. Statistics Canada reported employment fell 42,000 in August against forecasts for a 15,000 gain, following July's 75,000 increase, with the unemployment rate unchanged at 6.4% and the employment rate down a tenth to 60.8%. The losses were concentrated in business and building support services, down 20,000, public administration, natural resources and utilities, while manufacturing added 22,000. Quebec shed 19,000 positions and Ontario 18,000.
The report landed within minutes of American payrolls at 162,000, and the contrast moved the exchange rate several tenths of a per cent higher on the session. Two labour markets diverging that sharply in the same month is the clearest single argument for a lower Canadian dollar against the US dollar over the coming quarter, and it is currently being offset by an oil price that has risen 10% in a week for reasons unrelated to either economy.
Monday is a holiday in Canada and the United States, and the domestic calendar is close to empty for the rest of the week. That leaves the Canadian dollar taking its direction from crude oil and from Friday's American inflation report.
The oil channel is the more immediate one. WTI at $91.74 reflects a risk premium on the Middle East conflict rather than a change in the supply and demand balance, and premiums of that kind are reversible on a single headline. A further escalation would support the currency through the terms of trade even with the labour market deteriorating; a de-escalation would remove the offset and leave August's employment figures as the dominant domestic fact.
The Governing Council next meets in October with two more employment reports and two inflation prints in hand. A second consecutive contraction in jobs would make Wednesday's hawkish framing difficult to sustain, and the market would begin pricing the following move as a cut rather than a hold.
CHF: hot Swiss inflation, and a central bank still at zero
The Swiss franc was the second-strongest major currency over the week ending 4 September, behind only the yen, firming against both the US dollar and the euro. The move came from a domestic inflation surprise rather than from safe-haven demand, which distinguishes it from most weeks in which the franc leads.
Swiss consumer prices rose 0.8% on the year in August against forecasts of 0.5%, up from 0.4% in July and the highest reading since September 2024. That sits above the Swiss National Bank's own third-quarter forecast of 0.6% and arrives with the policy rate at zero, where it has been held since June. A central bank at zero facing an inflation rate that has doubled in a month is in a different position from one that has already tightened, and the franc's move reflected that repricing.
The swaps market has not yet followed the currency, and continues to price the first 25 basis point increase, to 0.25%, in June 2027. That gap between a currency responding immediately and a rate curve that has barely shifted is the franc's defining feature at present. The Bank's own projections have annual average inflation at 0.6% for both 2026 and 2027 and 0.7% for 2028, which is a forecast built on the energy shock fading.
The external environment did the rest. Euro area inflation at 3.3% and a fully priced European Central Bank increase would ordinarily weigh on the franc against the euro, and it did not. Energy accounted for most of the euro area figure, while the Swiss surprise was broader, and the market treated the Swiss print as the more informative of the two.
The Swiss calendar is light and the franc's direction this week will be set elsewhere. Thursday's European Central Bank decision is the first of the two events that matter. An increase to 2.50% delivered with projections that carry inflation higher into 2027 would narrow the policy gap and weigh on the franc against the euro; a decision framed around easing core and services inflation would leave the Swiss inflation surprise as the more persuasive of the two data points and support the currency further.
Friday's American consumer price index is the second. The franc has been trading on rate expectations rather than as a haven for several weeks, and a firm US core reading would restore the differential argument against it.
The National Bank's quarterly assessment falls later this month, and August's print has made the accompanying conditional forecast the thing to watch rather than the rate itself. A forecast revised up toward 1% for 2027 would pull the June 2027 pricing considerably closer.
NZD: the increase arrives, the projections disappoint
The New Zealand dollar eased over the week ending 4 September, trading near 0.5894 against the US dollar on Friday after a low of 0.5806 on Tuesday. The currency fell in a week when its central bank raised interest rates and the US dollar index declined 0.70%, which takes some explaining.
The Reserve Bank of New Zealand lifted the Official Cash Rate by 25 basis points to 2.75% on Tuesday, in line with expectations. The projections published alongside it were the problem. They point to the policy rate reaching 2.81% by December and 3.15% by the end of 2027, against market expectations of a peak nearer 3.5%. Governor Anna Breman said a further increase is likely but that policymakers want time to assess the impact of the tightening delivered so far.
A forecast track that ends more than 30 basis points below where the market had the terminal rate is a substantive downgrade, and the currency repriced accordingly within the session. The kiwi recovered through Wednesday and Thursday as the US dollar weakened on Waller's remarks, then gave part of that back on Friday's payrolls figure, finishing the week lower than it started.
The trans-Tasman comparison is the sharper way to see it. The Reserve Bank of Australia is priced at roughly two-thirds for an increase on 29 September with a further move fully priced for November, on the back of 3.6% trimmed mean inflation and 2.1% annual growth. New Zealand's central bank has just raised rates and told the market it expects to do very little more. That divergence has run for several weeks and last week widened it.
Friday's BusinessNZ manufacturing index is the only domestic release of consequence, and it is the kind of survey that matters more than usual when a central bank has just said it wants to observe the effects of what it has already done. A reading that holds in expansion would support the case for the further increase Breman flagged; a contraction would push the market toward the Bank's own flatter track rather than away from it, and the currency would find little support in either interpretation.
The larger influences are external. Tuesday's Chinese trade figures and Wednesday's Chinese inflation data matter for New Zealand's export prices, with August consumer inflation expected to rebound to around 0.9% from July's 0.5%.
Friday's American consumer price index will do the rest. The kiwi is now among the lowest-yielding of the currencies with a central bank still tightening, and a firm US core reading would leave it carrying that distinction into the 16 September Federal Reserve meeting.