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Political developments in France and Japan are limiting the euro's and yen's chance to rally against the softer dollar. The calendar is surprisingly busy this week with key events such as US payrolls, benchmark revisions, US August CPI and an ECB rate meeting. The 15 September US corporate tax payment date could keep the dollar temporarily bid, too.
 

USD: Overseas politics provides some dollar support

Friday's August jobs data was again on the soft side. It was soft enough to have the market starting to speculate whether the Federal Reserve would restart its easing cycle with a 50bp rate cut - as it did last September. The data triggered a 0.5% sell-off in the dollar, which has now largely been retraced. Limiting that dollar sell-off, we believe, has been political developments overseas. France today sees a confidence vote in the proposed 2026 budget (see below), where the government is expected to fall. And this weekend saw the resignation of Japan's Prime Minister, Shigeru Ishiba, which is adding to fears in the bond market about the prospect of looser fiscal policy emerging.

For reference, Japan will now hold an LDP leadership election on 4 October. Here, one point of focus will be whether someone like Sanae Takaichi comes to power on a ticket of fiscal expansion and slower normalisation of monetary policy. Given FX markets now seem to be taking fiscal risks far more seriously, the weekend development has seen USD/JPY gap above 148. What we would say, however, is that USD/JPY was already discounting a lot of political risk and may again stall in the 148.50/149.00 area rather than pushing above 150. That said, politics may now delay the drop towards 145 - which had been our call for the end of September.

For the dollar itself, this week carries some important inputs, too. Tomorrow sees the preliminary annual benchmark revision to the 2025 nonfarm payrolls report. A number in the -500 to 800k is expected. The Fed's Christopher Waller implied a number of around -720k in his speech just over a week ago. A big downward revision to NFP could trigger some limited dollar weakness. Expectations are now moving towards a 150bp easing cycle by next summer - taking the policy rate to 3.00%.

Also on the US agenda this week is Thursday's release of August CPI, where risks of a 0.4% month-on-month figure (consensus 0.3%) could provide the dollar with some temporary support. That could also hit Treasuries as well, which see $119bn in 3, 10 and 30-year auctions this week. Our rates strategy team share their latest thoughts on Treasuries here.

In addition to the above, we think the US corporate tax payment deadline of 15 September could provide the dollar with some support this week. Seasonally, the dollar does OK in September, and we note that the Fed's overnight SOFR rate is already edging up to the top of its range (now 4.41%) as short-term liquidity conditions temporarily tighten. We suspect that the DXY could be driven a little higher this week, before a bearish switch into next Wednesday's FOMC meeting.

That could mean DXY has another run at 98.50 this week.
 

EUR: French vote of confidence may weigh

EUR/USD has been unable to hold on to Friday's NFP-inspired gains. Holding the euro back is no doubt French politics, where Prime Minister Francois Bayrou today holds a vote of confidence in his planned 2026 budget. It looks like very few of the opposition parties have plans to tackle France's 5%+ of GDP budget deficit and would prefer to bring down the government. The outcome of such a vote could be President Emmanuel Macron asking Bayrou to stay on, Macron selecting a new technocrat PM, or Macron calling early elections. We see the risk of the French-German government bond spread moving through 80bp here - but we are not looking for a eurozone-wide period of stress. Italy and Spain have been enjoying sovereign upgrades recently, and the European Central Bank has its Transmission Protection Instrument (TPI) if things really get out of hand. In short, we tend to see this as a localised French issue - where a potential sovereign downgrade from Fitch (currently AA-, negative outlook) this Friday evening won't help either.

More volatility in a 1.1650-1.1750 range looks likely for EUR/USD this week, and we doubt Thursday's ECB meeting will be a big market mover.
 

GBP: Political reshuffle won't distract attention from Gilts

Sterling is holding steady. The enforced cabinet reshuffle by UK Prime Minister Keir Starmer on Friday did not touch Chancellor Rachel Reeves, who is valued for her market credibility. Softer US data has seen last week's global bond market sell-off abate - yet Gilts remain the weak link for sterling. There's no UK data of note this week and few Bank of England speakers. We suspect EUR/GBP can trade in a 0.8650-0.8700 range this week, given that next week's BoE meeting and news on quantitative tightening plans will be far more interesting.
 

CEE: Downgrade of Poland's rating outlook will increase market focus on fiscal policy

This week, we continue with inflation prints and central bank meetings in the CEE region. Today, hard data from the Czech economy will be released. Last week, retail sales surprised downwards, indicating some weakness in the economy after a long string of positive surprises. Tomorrow, August inflation figures will be released in Hungary, and we expect the headline figure to remain unchanged at 4.3%, one tenth below the National Bank of Hungary's forecast, while core inflation should fall from 4.0% to 3.9%. On Wednesday, we will see the final Czech inflation figures, which should be confirmed at 2.5%. On Thursday, the Central Bank of Turkey will meet and is expected to cut rates by 200bp to 41%, in line with market expectations, following higher-than-expected inflation last week. On Friday, current account figures across the CEE region will be released.

On Friday after the close of trading, Fitch downgraded Poland's sovereign rating outlook (A-) from stable to negative, which is likely to come as a surprise to the market. This comes after a surprisingly high fiscal policy deficit in the draft budget for next year. Given Friday's surprising decision, we are likely to see some pressure on bonds and FX today. Even before the rating agency's decision, we expected some ASW widening given the almost muted reaction after the presentation of next year's budget. The deterioration in the outlook is likely to increase market focus on budget figures. Based on the rate differential, EUR/PLN should be trading in a 4.260-270 range after last week's National Bank of Poland meeting. The rating action could help EUR/PLN move closer to 4.270.

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