USD: warm CPI, a hike in play, and a currency that would not rally on it
The US dollar ended the week firmer but well short of where the data alone might have put it. The dollar index recovered to around 99.06 on the back of robust producer price figures and anticipation ahead of Friday's consumer price report, then faded once that report actually landed. Against the yen the currency fell 1.30 per cent to 153.62, its weakest performance among the majors; against the euro it gained modestly, with EUR/USD down 0.26 per cent to 1.1598.
Friday's inflation print was the week's centrepiece. The Bureau of Labor Statistics reported that consumer prices rose 0.4 per cent in August on a seasonally adjusted basis and 3.4 per cent over the twelve months, with the core measure running warm enough to keep a September move firmly in play. Investors moved to assign roughly a 60 per cent probability to a 25 basis point increase at the Federal Reserve's meeting this week, a level that would have been unthinkable at the start of the summer.
Energy explains most of the inflation impulse, and the market appeared to conclude as much. Brent crude climbed around 8 per cent over the week and pushed through $100 a barrel as tensions around the Strait of Hormuz escalated, and once traders decided the price pop was concentrated in energy rather than spreading through services, the risk-off positioning built up through Tuesday and Wednesday unwound. Equities snapped a four-day decline, gold lost ground to rising yields, and the US dollar surrendered its intraday gains.
The tension is worth naming directly. A central bank that is close to tightening into an inflation overshoot would normally support its currency, yet the dollar underperformed the yen by well over a percentage point and only edged ahead of the euro — because the Bank of Japan and the European Central Bank are tightening too, and in the yen's case from a far lower base. Relative policy, not absolute policy, is setting the direction here.
Wednesday's Federal Open Market Committee decision is the week, and the distribution is genuinely two-sided. A 25 basis point increase alongside projections showing further tightening would validate the roughly 60 per cent already priced and should lift the currency, particularly against the low-yielders; a hold, or a hike framed as a one-off insurance move against the energy shock, would unwind that pricing quickly and leave the dollar exposed.
Retail sales on Wednesday sit awkwardly close to the decision but still matter for the growth read. A solid print would support the case that the economy can absorb tighter policy; a weak one would sharpen the argument that the Federal Reserve is tightening into an energy-driven squeeze on household spending rather than a demand boom.
The Bank of Japan on Friday is the other side of the dollar's biggest mover. With Japanese tightening roughly 80 per cent priced and the yen already the week's strongest major, the risk around USD/JPY is asymmetric into that meeting.
EUR: the ECB hikes, and the euro falls anyway
The euro slipped against the US dollar over the week despite the European Central Bank delivering a rate increase, finishing around 1.1598 after trading below 1.1612 in the wake of the decision. The 0.26 per cent decline is small in absolute terms, but the direction is the point: a currency whose central bank has just tightened would ordinarily firm, and this one did not.
The Governing Council raised all three key rates by 25 basis points, taking the deposit facility to 2.50 per cent, the main refinancing rate to 2.65 per cent and the marginal lending facility to 2.90 per cent, effective 16 September. Christine Lagarde described the decision as a "no brainer" and the vote was unanimous — this is the second increase of 2026, following the June move, and the language left little doubt that the Council saw the case as clear-cut.
Energy is the reason. The disruption to shipments through the Strait of Hormuz arising from the US–Iran conflict has pushed oil back above $100 a barrel, and Eurosystem staff now expect headline inflation to average 3.0 per cent in 2026 before easing to 2.3 per cent in 2027 and 2.0 per cent in 2028. A central bank raising rates against an imported supply shock is tightening into weaker growth, not stronger, and investors priced accordingly.
Equity markets made the same read. The STOXX 600 fell 0.7 per cent on the decision, which points to a market weighing the growth cost of tighter policy more heavily than the yield benefit to the currency. The euro's relative resilience against the US dollar, such as it is, owes more to the dollar's own fade on Friday than to anything the Council did.
The Federal Reserve on Wednesday matters more for this pair than anything scheduled in Europe. If the Committee hikes and signals further moves, the narrowing of the rate gap that the ECB's own increase created would reverse and the euro would likely test the lower end of its recent range; a hold or a dovishly framed hike would do the opposite and give the single currency room back above 1.16.
Oil is the second input, and it works against the euro in both directions. Further escalation around the Strait of Hormuz would push euro area inflation forecasts higher while damaging the growth outlook, a combination that has not helped the currency so far; a de-escalation would ease the inflation problem but also remove the case for the tightening that is currently the euro's main support.
GBP: a GDP beat steadies sterling before the Bank decides
Sterling held around $1.3522 into Friday's close, up fractionally on the session and stable near the $1.35 handle through most of the week. The pound's performance was quieter than the euro's or the yen's, which in a week defined by central bank surprises and an oil shock counts as a result rather than an absence of one.
The Office for National Statistics provided the domestic story. UK output grew 0.4 per cent in July, following a 0.3 per cent expansion in June and comfortably beating expectations for no growth at all, with services, production and construction all contributing. A month of broad-based expansion does not settle the question of whether the economy can absorb tighter policy, but it removes the most obvious argument against it.
Rate expectations firmed on the back of that. Markets are now fully pricing four Bank of England increases by the end of 2027, with Bank Rate currently at 3.75 per cent and the Monetary Policy Committee widely expected to leave it there this week. Andrew Bailey has been careful to tie future decisions to economic and geopolitical conditions, which in the present environment means the oil price as much as the domestic data.
The pound's relative calm reflects a market that has already done most of its repricing. Sterling firmed against both the euro and the US dollar on the GDP release, and ING has continued to argue that GBP/EUR drifts toward 1.15 over time, a view that rests on the euro area's rate path catching up rather than on any particular weakness in the UK.
UK consumer prices on Wednesday are the week's first test, and they land the same day as the Federal Reserve decision. An inflation reading that runs hot would harden the case for the tightening already priced through 2027 and support the currency; a softer print would leave the Monetary Policy Committee more comfortable holding through the energy shock and take some of that support away.
The Bank of England follows on Thursday. A hold is the expected outcome, so the vote split and the accompanying language will carry the information — dissents in favour of a hike would reinforce the market's four-increase path, while a unanimous hold with cautious wording on growth would invite some unwinding of it. Retail sales on Friday close the week and will matter mainly for whether July's growth beat looks like the start of something.
JPY: the week's strongest major on Bank of Japan hike bets
The Japanese yen was the standout performer of the week, with USD/JPY falling 1.30 per cent to 153.62 by Friday's close. That move came in a week when the US dollar was supported by warm inflation data and rising Federal Reserve expectations, which makes the yen's strength a statement about Japan rather than a by-product of dollar weakness.
Policy expectations drove it. Reuters reported, citing three people familiar with the Bank of Japan's thinking, that the Bank could raise rates as soon as its 17–18 September meeting and is considering accelerating tightening beyond its recent pace of roughly two increases a year. Investors moved to price a September move at around 80 per cent, and the yield on five-year Japanese government bonds reached a record high.
The move builds on ground already taken earlier in the month. The yen jumped more than 2 per cent against the US dollar in early September, touching 155.28 at one point, in a session where traders were weighing the prospect of both a rate increase and further official intervention. The currency has since firmed through 154 without needing intervention to get there, which is a meaningfully different situation from the one policymakers faced through the middle of the year.
Carry unwinding is the other channel worth naming. Yen-funded positions have been sliding as Japanese yields rise, and the resulting flows have supported other low-yielders including the Swiss franc. Rising global yields elsewhere would normally work against the yen; that this has not happened points to the domestic rate story carrying more weight than the differential.
Friday's Bank of Japan decision is the event, and with roughly 80 per cent already priced the risk is skewed toward disappointment. An increase delivered with an indication that the pace of tightening will accelerate would confirm the market's read and should extend the yen's gains; a hold, or a hike accompanied by language stressing patience, would leave a crowded position to unwind and could push USD/JPY back through 155 quickly.
The Federal Reserve on Wednesday sets the other half of the equation. A hawkish Committee two days before the Bank of Japan meets would cushion any yen strength by widening the differential; a Federal Reserve that holds, or hikes cautiously, would leave the yen with a clear path if Tokyo then delivers.
CAD: oil above $100 and the currency still slipped
The Canadian dollar weakened against its US counterpart over the week, with USD/CAD rising to around 1.3862 on Friday, up 0.28 per cent on the session, after holding near 1.3838 earlier in the day. What makes that move notable is its context: Brent crude climbed roughly 8 per cent on the week and traded above $103, and a petro-currency that cannot firm on an 8 per cent oil rally is telling you something about the other forces in play.
Trade policy is the most obvious of them. Canadian counter-tariffs took effect on 8 September, and US–Canada trade tension has been the main downside risk to the currency for some months. Tariffs that raise costs on both sides of the border cut against the growth outlook in a way that a higher oil price does not straightforwardly offset.
The Bank of Canada's position has firmed in the meantime. Governing Council held the policy rate at 2.25 per cent on 2 September, acknowledging a broadening recovery and increased inflation risks in language that read as mildly hawkish, while noting that tariffs and excess supply leave the outlook uncertain. That is a central bank with room to move but no particular urgency to use it.
The rate gap explains the rest. With the Federal Reserve close to tightening from a far higher starting point and the Bank of Canada holding at 2.25 per cent, the differential has been widening in the US dollar's favour regardless of what crude does. Analysts have generally framed the pair as range-bound between 1.37 and 1.41, with 1.39 the anchor.
Canadian consumer prices on Monday open the week and give the first read on how much of the oil move has reached the domestic basket. A firm print would strengthen the mildly hawkish tilt in the Bank of Canada's September statement and support the currency; a soft one would leave Governing Council comfortable on hold and push the pair toward the upper half of its range.
The Federal Reserve on Wednesday is the larger input. A hike with hawkish projections would widen an already wide differential and put 1.39 and above in play; a hold or a cautious hike would let the oil story reassert itself and give the Canadian dollar a chance to test the lower end of the range.
Crude remains the variable that could override both. Sustained disruption around the Strait of Hormuz keeps the commodity channel working in Canada's favour, though the past week suggests that channel is currently weaker than the rate and trade channels running against it.
CHF: safe-haven demand against a widening rate gap
The Swiss franc traded in a narrow band against the US dollar over the week, with USD/CHF near 0.8090 in early European trade on Tuesday and around 0.8140 by Friday's Asian session. A move of that size is modest, and it came with two substantial forces pulling in opposite directions.
Geopolitics supplied the support. Iranian missile activity directed at US warships and the broader disruption to shipping through the Strait of Hormuz pushed investors toward haven assets through the first half of the week, and the franc is among the first places that demand lands. Flows out of yen-funded carry positions added to it, as rising Japanese yields forced the unwinding of trades that had been short both low-yielders.
The rate differential worked the other way, and by Friday it was working harder. Investors assigned roughly a 60 per cent probability to a 25 basis point Federal Reserve increase this week, while the Swiss National Bank is widely expected to keep its policy rate at zero well into next year, with domestic inflation comfortably inside its mandate of below 2 per cent. A gap that wide is difficult for haven demand to offset indefinitely.
The franc's year has been shaped by that tension. The currency reached an eleven-year high against the US dollar in January and has since traded between structural appreciation and cyclical pressure from the differential, and this week was a small version of the same argument. Neither side won it.
Wednesday's Federal Reserve decision will do most of the work. A 25 basis point increase with hawkish projections would widen a differential the Swiss National Bank has no intention of narrowing and should lift USD/CHF; a hold or a cautiously framed hike would leave haven demand as the dominant influence and pull the pair back toward 0.80.
Middle East developments are the other input, and they are not on any calendar. Further escalation around the Strait of Hormuz would push flows into the franc regardless of the rate gap; a de-escalation would remove the support that has been offsetting the differential all month and leave the currency exposed to it.
NZD: a dovish hike leaves the kiwi without much to work with
The New Zealand dollar rose to around 0.5811 against the US dollar on Friday, up 0.30 per cent on the session, but the weekly picture is flatter than that single move suggests. The currency has weakened 0.84 per cent over the past month and is down 2.19 per cent over the year, which places it among the weaker majors in a period when several central banks have been tightening.
The Reserve Bank of New Zealand's September decision is the reason. The Monetary Policy Committee raised the Official Cash Rate by 25 basis points to 2.75 per cent on 2 September, a second consecutive increase after July's move, and then framed it in terms cautious enough that the market read the whole exercise as a dovish hike. Policymakers have since signalled growing concern about the growth outlook, and the currency has not recovered the ground it lost in that session.
Rate pricing now reflects that caution. Markets largely expect the Reserve Bank to hold in October, with a December increase treated as close to certain — a path that delivers tightening eventually but at a pace well short of what Australia is pricing, and from a starting point more than two full percentage points below the Australian cash rate.
The kiwi's participation in the week's commodity rally was limited. Oil above $100 helps currencies with energy exports rather than those that import their fuel, and New Zealand sits on the wrong side of that division, which left the currency dependent on the US dollar's Friday fade for most of its gain.
Second-quarter GDP on Thursday is the domestic event that matters, and it speaks directly to the concern that made the September hike dovish. A firm growth reading would ease the Committee's worries and make the December increase look more secure, which would support the currency; a weak print would strengthen the case for an extended pause and leave the kiwi exposed.
The Federal Reserve on Wednesday sets the backdrop. With the Official Cash Rate at 2.75 per cent, New Zealand offers less carry than most of its peers, so a hawkish Committee would weigh on this pair more than on the higher-yielding crosses; a Federal Reserve that holds would give the kiwi a broader lift than the domestic data alone would justify.