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The week ahead features five G10 central bank meetings. Two will most likely cut rates, the US and Canada, and two will stand pat, the Bank of England and the Bank of Japan. Norges Bank, Norway's central bank also meets.It is a close call but we lean slightly in favor of it cutting 25 bp, which would bring the deposit rate to 4%.The Federal Reserve is the most interesting. First, the Senate is expected to confirm President Trump's nomination, Stephen Miran as appointment as Fed governor Monday afternoon, less than 24 hours before the beginning of the FOMC meeting. While a 25 bp cut is the most likely scenario, the derivatives markets are discounting almost a 10% chance of a 50 bp cut. It is possible that Miran, and Governor Waller, who intimated that further deterioration of the labor market, could incline him to favor a 50 bp cut, may dissent. The risk is that such dissents will add to the consternation in some quarters of how fragile the Fed's independence (from partisan politics). Several foreign central bankers at last month's Jackson Hole confab expressed concern. Second, the Trump administration has asked for the appeal court to stay the earlier order that allow Governor Cook to retain her post while she sought legal recourse to her dismissal. A decision is possible before the US markets open on Monday. 

In some ways these US developments fan what seems to be two related and crowded trades: short dollars and long gold. It is difficult to find a contrarian view. Our concern is tactical rather than strategic. The Dollar Index bottomed on July 1, the same day that the euro and sterling recorded their multi-year highs. And while we highlight the correlation of changes in US rates and the dollar-yen exchange rate, the dollar bottom against the yen on April 22. Last week, the US 10-year yield traded slightly below 4.0% on an intraday basis for the first time since early April. The US two-year yield recorded its five-month low on September 5, near 3.46%. 

U.S.

Drivers: The US dollar appears most sensitive to interest rate expectations. The rolling 30-day inverse correlation between changes in the Dollar Index and December 2025 Fed funds futures is near 0.65. It has rarely been more over the past year. Recall that for the first time in three years, in late March and early April, as US tariff threats dominated, the 30-day correlation turned positive.

Data: The reports August retail sales, import/export prices, and industrial output on Tuesday ahead of the main event of the week, the FOMC meeting. Despite elevated price pressures, the derivatives market is confident that the Federal Reserve will cut the Fed funds target this week and resume its easing cycle. The Senate is due to vote late Monday on Miran's nomination. There is some risk he dissents in favor of a 50 bp cut. The Summary of Economic Projections will be updated. Recall that in June, seven Fed officials did not expect to cut rates even once this year. Recognizing even one cut this year will push next year's median projected rate lower. The current average effective rate (weighted average transactions in the Fed funds market) is about 4.33%. The Fed funds futures are pricing in about a 2.90% rate at the end of next year. The median projection in June was 3.625%. With the use of the Fed's reverse repo facility falling and the level of bank reserves trending lower, the Federal Reserve may begin discussing quantitative tightening, the unwinding of its balance sheet through not replacing all the maturing Treasury and Agency securities. The Fed's desire to reach the "minimum ample level" leaves room for discretion. Governor Waller estimated that such a level is around $2.7 trillion. At the current pace of unwinding, it is still more than six months away. However, this was one estimate about something that is difficult to know a priori but that means that the Fed will prefer to err on the side of caution and that will be sensitive to other signs of strain that could develop. Moreover, the use of the reverse repo facility suggest that the Fed may be closer to the “minimum ample level” than supposed. The mid-month corporate tax date and the quarter-/fiscal year-end at the end of the month may provide a pre-taste of the financial strains. Still, the measure of bond market volatility (MOVE) is near a three-year low. 

Prices: The Dollar Index bottomed on July 1, near 96.35 and reached 100.25 a month later. It has been trading in that broad range. On September 9, it recorded its lowest level since late July around 97.25. Market sentiment remains nearly wholly negative. That said, a move above the band of resistance (~98.30-98.75) may spur a short-squeeze. 

EMU

Drivers:   The 30-day rolling correlation of changes in the euro and Germany's two-year yield is inverse at around -0.35. It was positively correlated between mid-November 2024 through mid-May 2025. The rolling 30-day correlation of changes in the euro and the US two-year yield is inverse at around -0.77. It positively correlated from early March through early April this year. The changes in the euro are a little less correlated with changes in the US two-year premium over Germany near -0.60 over the past 30 sessions. The last time the two were positively correlation was briefly in 2022. After the markets closed before the weekend, Fitch cut France's rating to A+ from AA-. It was not much of a surprise.On the other hand, Fitch raised Portugal's rating to A from A-.The rating agency gave both stable outlooks. Separately, citing the improvement in the Spain's external balance and private sector deleveraging, S&P raised Spain's rating to A+ from A, with a stable outlook. France's 10-year yield settled before the rating announcements about 22 bp on top of Spain, 38 bp above Portugal's, and less than two basis points below Italy.  

Data: The eurozone aggregate July trade and current account figures tend to elicit much of a market reaction. The national figures, especially Germany's, are already known. There is little new substantive information. The same can be said for the July industrial production figures. Germany's industrial output rose 1.3% and Italy's rose by 0.4%, while France’s tumbled 1.1%, and Spain slipped by 0.5%. The market anticipates that the Q3 economic pulse will remain faint around 0.1% the same as Q2. 

Prices: For a little over a month, the euro has been mostly confined to a $1.16-$1.18 range. Despite intraday violations of the lower end, it has not settled outside of the range since August 5. In that range, the five-day moving average is above the 20-day moving average (since August 8). One-month implied volatility is near 6.5%, the lowest since last November. Three-month implied volatility is slightly below 7%. The year's low was set in late March, a little below 6.9%. 

PRC

Drivers: Beijing closely manages the exchange rate. Its declaratory policy is one of broad stability against the dollar. The rolling 30-day correlation of changes in the Dollar Index and the offshore yuan is near 0.37. It is inversely correlated euro (-0.31) and positively correlated with the dollar against the yen (~0.47).

Data: It is an important week for Chinese data. August fixed asset investment is expected to have slowed on year-to-date, year-over-year basis, but we note the decline began in April and the July pace (1.6%) was already the weakest since the pandemic. August real sector data and house prices are also due the same day (September 15). Retail sales and industrial production are expected to have improved marginally sequentially on a year-over-year basis. Home prices likely continued to slowly bleed lower, and investment has not returned to the property market.

Prices: The dollar fell to new lows for the year against the yuan last week (~CNH7.1130). Yet ahead of the weekend, it posted its highest settlement of the week near CNH7.1250. Still, only a move above CNH7.15 would be technically significant. The strong equity market performance over the last few months and speculation that the PBOC may renew bond buying in Q4 may encourage global asset managers to return. The PBOC lowered the dollar's fix in four of last week's five sessions but has held it above CNY7.10. A break of this threshold may fan the speculation that is gradually moving toward CNY7.00. 

JAPAN

Drivers: The yen's exchange rate remains sensitive to changes in US rates. Recently (past 30 sessions), the correlation with changes in the US two-year yield have surpassed the correlation with changes in the 10-year yield (0.83 vs 0.77, respectively). While this is more robust than the correlation with Japanese rates, the changes in the differentials are also notable. The 30-day rolling correlation of changes in the exchange rate and the US-Japanese two-year spread is around 0.63, after setting a two-year high earlier this month near 0.85. The rolling 30-day correlation of changes in the exchange rate and the US Japanese 10-year differential is slightly above 0.65. Its two-year high was also set earlier this month, near 0.85. 

Data: The industrial sector is more volatile than the tertiary sector, but the tertiary sector activity has risen by an average of 0.4% in H1 25, while industrial output has risen by an average 0.3%. Japan reports the July tertiary sector activity on September 16 followed by the August trade figures the following day. There is a seasonal pattern of deterioration from July (15 in the past 20 years). The August CPI will be reported on September 19 but the Tokyo CPI (reported August 29) already informed expectations for that the headline pace likely slowed for the fourth consecutive month and likely slipped below 3% for the first time since last November. The same holds true for the core rate, which excludes fresh food. It will likely slow to less than 3% but it will be the third consecutive decline. The BOJ meeting ends a few hours later. There is practically no chance that the BOJ cuts rate, but the market will be sensitive to Governor Ueda's verbal signals.

Prices: Last week's range was set on Monday and Tuesday: ~JPY146.30-JPY148.60. It looks poised to test the upper end of that range. That could dovetail with US rates recovering from their recent extremes, which saw the two- and 10-year yields fall to five-month lows. The implied yen volatility is low, a little above the lows for the year seen in mid-August. 

UK

Drivers: Sterling is sensitive to the overall dollar direction. The rolling 30-day inverse correlation of changes in the exchange rate and changes in the Dollar Index is near -0.80. It has not been greater than -0.90 this year, though in 2023 and 2024 neared -0.95 at the extreme. The 30-day correlation with the euro itself is slightly more (~0.84). The inverse correlation with changes in the US two-year yield is near -0.57, and near -0.32 with the two-year Gilt. The inverse correlation of the changes in the exchange rate and the two-year interest rate differential is around -0.52. Although the long-end of the UK curve is the subject of must consternation, the inverse correlation of the changes in exchange rate and the 30-year Gilt yield is less than with the two-year Gilt (~-0.38). 

Data: It is a big week for the UK. Not only will the three data points that the market is the most sensitive to be reported (jobs, inflation, and retail sales) but the Bank of England meets as well. The labor market is slowing. A BOE survey released earlier this month showed British companies are laying off employees at the fast pace in four years. Headline inflation may tick down a little given the 0.3% rise in August 2025 but will remain elevated. Unlike the Fed's dual mandate, the BOE is changed with price stability, and officials have made it clear they are in no hurry to cut rates again. The swaps market does not have the next cut fully discounted until April 2026. August retail sales will be reported after the BOE meeting. Retail sales, reported on a volume not price basis, fell by an average of 0.1% a month in Q2 after rising by an average of 0.6% a month in Q1. 

Prices: Sterling approached $1.36 last week. It held, as it did in late July and mid-August. Sterling has not traded above there since mid-July. Initial support may be around $1.35. The 20-day moving average will begin the new week slightly lower and it roughly corresponds to the (38.2%) retracement of this month's rally. The (50%) retracement is near $1.3460. 

CANADA

Drivers: There are two regularities that are notable. First, the Canadian dollar typically does better on the crosses in a firm US dollar environment and typically under-performs in a softer US dollar environment. Second, the Canadian dollar is sensitive to the broad movement of the greenback. The rolling 30-day correlation is slightly below 0.70. The high from late August was near 0.80, the highest in a little more than a year. 

Data: There are two highlights in the coming week. On Tuesday, Canada reports August CPI. In the three months through July, Canada's CPI rose at an annualized rate of 4.0%, down from 5.2% in the previous three months. The year-over-year rate has been hovered in the 1.7%-1.9% for the past four months. with a 1.7% print in July. The base effect warns of some upside pressure as the 0.2% decline in August 2024 and the 0.4% last September drop out of the 12-month comparison. And the underlying core rates have been holding a little above 3%. This poses a challenge for the Bank of Canada, given the sharper than expected economic contraction in Q2 and the disappointing August employment report. The central bank meets on Wednesday, with the outcome a several hours before the FOMC decision is announced. The swaps market has about an 87% chance of a cut discounted.

Prices: The US dollar rose from about CAD1.3725 on August 29 to almost CAD1.39 last week, ahead of the US CPI. On the pullback, it met the (38.2%) retracement of the rally (~CAD1.3825) and the 20-day moving average (~CAD1.3820). Below there, initial support may be encountered around CAD1.3780. The August high was set near CAD1.3925 and a move above there targets the CAD1.40 area. 

AUSTRALIA 

Drivers: The Australian dollar's rolling 30-day inverse correlation with the Dollar Index in early September (~-0.85) has not been more extreme since the first half of 2024. It is now near -0.75, and so is the correlation with the US dollar's exchange rate against the Canadian dollar. The rolling 30-day correlation with gold has fallen below 0.40 for the first time since late July. The Aussie has also become more sensitive to changes in the US two-year yield. The rolling 30-day inverse correlation is near -0.57. The most extreme reading in a little more than a year was reached earlier last week near -0.62. The correlation with the two-year differential is near 0.30. This year's peak was in January, closer to 0.65. The rolling 30-day correlation with Australia's two-year yield is a little less than 0.10.

Data: Australian reports August employment figures on September 18. Barring a dramatic deterioration, the Reserve Bank of Australia is unlikely to cut rate when it meets at the end of the month. Through July, Australia created an average of 16.2k jobs this year, slightly less than half of Jan-July 2024 pace. It grew an average of 17.6k full-time positions a month this year (it lost part-time positions) after an average of 30.4k in the Jan-July 2024 period. The unemployment rate was at 4.2% in July, net-net unchanged from July 2024. The participation rate has been at 67.0% for the three months through July. It was at 61.1% in July 2024.

Prices: The Australian dollar reached a new high for the year ahead of the weekend near $0.6670 before pulling back, stopping slightly shy of the 200-week moving average (~$0.6680). Since the day before Fed Chair Powell spoke at Jackson Hole (August 22), it is the strongest of the G10 currencies with around a 3.4% gain. The momentum indicators are stretched. Initial support is seen in the $0.6590-$0.6600 area. 

MEXICO

Drivers: The Mexican peso has become more sensitive to the US dollar's broad movement. The rolling 30-day correlation of the changes in the dollar against the peso and the Dollar Index peaked a little above 0.75 in late August, which is the highest in around three years. It is still high, near 0.68. The correlation with changes in the US two-year yield is less than 0.20, and the inverse correlation with the S&P 500 is around -0.30. 

Data:It is a light week for the Mexican economic calendar. Brazil's central bank will announce the results of its policy meeting a few hours after the Federal Reserve on September 17. Brazil's tightening cycle began last September with the Selic rate at 10.50%. It reached 15.0% in June and the central bank seems content, though inflation (IPCA) has been holding above 5% year-over-year since February.

Prices: The US dollar fell to a new low for the year against the Mexican peso last week, slightly to almost MXN18.4375 ahead of the weekend. Most of the damage was down after the US CPI.The next technical target may be near MXN18.40, but there is likely more in the pipeline. Looking at Bloomberg surveys, the median forecasts have not embraced the strength of the peso this year. It has risen more than 12.5% against the dollar in the spot market and nearly 20% including the carry for dollar-based investors. One- and three-month implied vol are at new lows for the year (~8% and 9% respectively). The dollar also recorded a new low for the year against the Brazil real in the second half of last week. It fell slightly below BRL5.3450 ahead of the weekend. The next interesting chart area may be in the BRL5.29-BRL5.30 area. The Brazilian real has appreciated by about 14.75% this year, and with the carry, has returned almost 26% to dollar-based investors. Yet, the implied volatility is higher than the peso and the liquidity in BRL is less than MXN. 

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