EUR/USD Could Rebound as Bond-Driven US Dollar Strength Looks Overdone

Forex

Summary:

EUR/USD is rebounding after a dollar surge tied to bond sell-offs. Analysts see dollar strength as overdone, with upside potential above 1.1700 if U.S. data weakens and ECB holds rates.

Following Tuesday’s drop, the EUR/USD was trying to find its feet again as investors looked ahead to the release of key US data this week. The FX markets kicked off September with a punchy US dollar rally on the first full trading day for US investors, leaving plenty of traders scratching their heads.

Much of the move seemed tied to the sell-off in long-dated bonds across the globe. But let’s be clear: this doesn’t change the bigger picture. The US dollar index (DXY)’s strength looks a touch overdone and could well fade in the coming days as markets refocus on the data and the Fed. Thus, I still expect to see a bullish breakout above 1.1700 resistance.

ECB unlikely to cut rates despite French troubles

The EUR/USD currency pair has been held back in recent days in part because of French political risk and the resulting underperformance of the OATs (French Treasury bonds). That said, it looks like much of that drag is already priced in, and the bar for another rate cut by the ECB is set high.

The eurozone’s trade agreement with the US could have been far worse. What’s more, we have seen a bit of improvement in forward-looking sentiment indicators from Germany and a few other Eurozone countries. And let’s not forget that inflation has been somewhat hotter than expected.

Indeed, the core CPI inflation reading came in hotter yesterday although that didn’t immediately lift the euro. It came in unchanged at 2.3% y/y versus 2.2% expected. But this morning, the single currency was rebounding again, perhaps in delayed reaction as yesterday it was all about the dollar and bond markets.

What’s more, Eurozone PPI also came out slightly stronger this morning at +0.4% m/m vs. +0.2% eyed. However, the final estimates for the PMIs data were revised slightly lower, with German services for example falling below the 50.0 level at 49.3 compared to 50.1 reported initially. This kept the euro’s gains in check.

All told, I think EUR/USD has room to claw back some of yesterday’s losses, with a push back above 1.17 looking achievable, especially if US data disappoints later this week and not to mention the fact that the ECB seems in no rush to move on interest rates again.

Key US Data in Focus

On the USD side of the EUR/USD, yesterday’s surge in the US dollar index chart didn’t have a convincing catalyst beyond the broader bond sell-off — and that’s hardly the stuff of lasting momentum. Rising debt jitters outside the US may have triggered some position-squaring, but with key economic data ahead and Fed easing likely later this month, I suspect the greenback will give back some ground.

We will have some key US data to look forward to as we head into the business end of the week, starting today with JOLTS job openings. It’s taken on more significance after Powell all but admitted that labour market risks are now more pressing than inflation.

The data is expected to reveal 7.38 million job openings in July, excluding the farming industry. Granted, the data release is a bit out-dated, but it can nonetheless impact the market because job openings are a leading indicator of overall employment.

More significant data releases will follow on Thursday and Friday,

The ISM Services PMI will be released on Thursday. Though the less closely-followed S&P Global’s PMI data have shown improvement, investors and traders tend to focus more on the ISM data as a more reliable forward-looking indicator about the health of the world’s largest economy.

The ISM services PMI has stagnated around the boom-bust level of 50.0 for several months now and that trend will need to improve if the dollar has any chance of a decent comeback.

Then it is all about the US nonfarm payrolls on Friday. Following last month’s much weaker jobs report and those big downward revision, the Fed Chair all but confirmed rate cuts were coming in September. This jobs report has the potential to dictate the pace of the next few rate cuts, or, if it comes in much higher, bring about fresh uncertainty about the near-term outlook for monetary policy direction.

For now, I see downside risk for the US dollar into Friday’s payrolls, particularly if job openings point to cooling demand today.

EUR/USD Technical Analysis and Levels to Watch

From a technical standpoint, the EUR/USD looks relatively steady. The single currency continues to consolidate inside a triangle pattern on the daily chart, potentially gearing up for a bullish breakout soon. Short-term support for the EUR/USD comes in around the 1.1560-1.1620 range.

Below that 1.1500 is the next key support to watch. On the upside, resistance is seen around 1.1700 where the resistance trend of the triangle comes into focus. Above that, the July high of 1.1830 is the next target. If and when we get there, the focus will then turn to the next psychologically important 1.20 handle next.

Source: investing

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Adam

Commodity

A stellar year for precious metals

Gold prices continue to rally after delivering 4.8% returns in August, the strongest month since April. Gold has just broke a new record at $3547 per ounce yesterday, representing a remarkable 35% year-to-date gain. This extraordinary rally has shattered multiple records, with the precious metal hitting new all-time highs throughout the year.

Silver has been even more impressive, rising over 41% year-to-date. It surpassed $40 per ounce for the first time since 2011 on Monday. This performance has finally closed some of the performance gap between gold and silver.

The rally in both metals has been nothing short of spectacular when viewed against broader market performance. They have both outperformed all major asset classes so far this year, including the Hang Seng Index (+27%) and Bitcoin (+19%). Higher interest rates would normally weigh on non-yielding assets like gold and silver, yet both continue to attract significant investor interest amid ongoing uncertainty.

Figure 1: Gold and silver year-to-date performance

Performance driven by Federal Reserve rate policy

The Federal Reserve's (Fed) monetary policy stance remains a crucial driver for precious metals prices. Market expectations of future rate cuts have provided significant tailwinds for precious metals. The bond futures market is pricing in 92% probability for a rate cut in September, and a 85% chance of two or more cuts by the end of the year, with Fed officials noting that risks of higher unemployment and inflation have risen.

Lower interest rates reduce the opportunity cost of holding non-yielding assets like gold and silver. When central banks cut rates, the respective currency becomes less attractive, redirecting investments toward precious metals as alternative stores of value.

US job data this week, including the Job Openings and Labour Turnover Survey (JOLTS) results tonight and the non-farm payrolls report due Friday, will play a critical role in shaping the monetary policy path ahead.

Geopolitical uncertainties fuel safe-haven demand

Heightened geopolitical risks continue to provide substantial support for precious metals prices. The sharp rally this year has been propelled by President Trump's tariffs, urging investors to seek refuge in tangible assets that maintain value during periods of policy uncertainty.

Trade tensions between the US and China add another layer of uncertainty. President Trump's focus on tariffs has created additional market volatility, with investors seeking refuge in tangible assets that maintain value during periods of policy uncertainty. With the federal appeals court's ruling most of the tariffs illegal, investors are even more puzzled on what this entails for the US as tariff revenues are at stake while the bridges with allies have already been burnt.

Another wildcard that may change the geopolitical picture is the ongoing conflicts between Russia and Ukraine. There has been little progress made on resolving the conflict since the talk between Trump and Putin. A de-escalation in the conflict may reduce interests for precious metals.

US dollar's status questioned

Recent political developments have raised concerns about Federal Reserve independence. The dismissal of Fed Governor Lisa Cook over alleged misconduct created uncertainty about policy stability, causing the US dollar index to slip and supporting precious metals prices.

Mounting government debts have also reduced the dollar's appeal as a store of value given the fiscal instability. The US Dollar index (DXY) declined 9% so far this year and has been a significant catalyst for precious metals strength.

In a recent survey conducted by the World Gold Council, 73% of the central banks respondents expect to reduce US dollar reserves in the next five years while 76% anticipate to increase gold reserves. Central bank demands remain strong with 123 tonnes of net purchases in the first half of 2025.

Strong investment demand drives prices higher

Silver investment demand through physical silver and ETPs is forecast to rise 9% in 2025 compared to 2024 according to the Silver Institute. Retail investors are increasingly viewing silver as an alternative to gold, attracted by its lower entry price and industrial applications. This dual appeal as both a monetary and industrial metal makes silver a unique asset class to invest in.

Investment demand for gold is also robust. Global physically-backed gold exchange-traded funds (ETF) attracted over $3 billion net inflows last week, which marks the strongest weekly inflows since mid-April.

Figure 2: Global gold ETF flows

Technical analysis shows bullish momentum continues

Gold's technical picture remains compelling, with the metal supported by all major moving averages in what has been a textbook uptrend. Tuesday's decisive break above the previous peak at $3500 also cleared the upper boundary of an ascending channel, suggesting the bulls are firmly in control.

The Elliott Wave count points to gold currently in Wave 5 of its uptrend from the May lows. A 100% Fibonacci extension of Wave 1 targets resistance around $3638, providing a logical area where significant sell-off could emerge.

That said, the relative strength index (RSI) is flashing overbought warnings that traders should heed. While this doesn't necessarily mean the rally is over, it does suggest a period of consolidation or modest pullback could develop. Any dip should find support at the 20-day moving average around $3398.

Figure 3: Spot gold (daily) price chart

Silver's chart tells a similar story of strength, though the white metal faces a crucial test at current levels. The $41 resistance encountered this morning aligns perfectly with the 61.8% Fibonacci extension of the July-to-August rally, making it a technically significant level.

The Elliott Wave pattern suggests silver is also in its fifth and potentially final wave of the current advance. If this interpretation proves correct, we could see some consolidation around these levels before the next major move develops.

Should the current resistance hold, a 38.2% retracement would target the $39.15 area, which coincides with July's resistance that has now turned support. This would represent a healthy pullback in what remains a strong uptrend. However, a clear break above $41 would open the path to $43-44, where silver last traded during August 2011.

Figure 4: Spot silver (daily) price chart

Source: ig

Risk Warnings and Disclaimers

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Daniel Carter

Central Bank

Economic

Federal Reserve Governor Christopher Waller on Wednesday repeated his call for an interest-rate cut in September given the weakening in the labor market, and said that how fast the central bank cuts after that will depend on what happens next in the economy.

"I think we need to start cutting rates at the next meeting, and then we don't have to go in a locked sequence of steps," Waller said in an interview on CNBC. "We can kind of see where things are going, because people are still worried about tariff inflation ... I would say over the next three to six months, we could see multiple cuts coming in."Waller, one of two Fed governors who dissented in favor of a rate-cut in July, said he believes tariffs may push up inflation over the next several months, but said he expects that to be temporary and for inflation to resume falling back toward the Fed's 2% goal in six or seven months.

Given the drop in labor demand, he said, the Fed should start bringing the policy rate, now in the 4.25%-4.50% range, down toward an estimated neutral rate of 3% -- with the pace of adjustments to depend on the economic data.

Waller said he has spoken with US Treasury Secretary Scott Bessent in the past but has not had an interview for the job of Fed chair and does not yet have one scheduled. Bessent is expected to have a round of interviews for the job starting Friday, the Wall Street Journal reported.

Source: Kitco

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Adam

Stocks

Economic

The long-run expected total return for the Global Market Index (GMI) continued to hold in the low-7% range in August, based on the average for three models (defined below). The expected performance remains well below the trailing 10-year return for GMI, a market-value weighted mix of the major asset classes (excluding cash).

US equities and commodities are the downside outliers for expected return in relative terms vs. their respective trailing performances over the past decade. GMI’s projected 7.1% annualized total return is also expected to deliver a softer performance vs. its trailing 8.9% gain. By comparison, the other asset classes are projected to generate returns above their performances over the previous 10 years.

Long-Run Forecasts Put US Equities, Commodities Behind Other Assets_1

GMI represents a theoretical benchmark for the “optimal” portfolio that’s suited for the average investor with an infinite time horizon. Accordingly, GMI is useful as a starting point for customizing asset allocation and portfolio design to match an investor’s expectations, objectives, risk tolerance, etc. GMI’s history suggests that this passive benchmark’s performance is competitive with most active asset-allocation strategies, especially after adjusting for risk, trading costs and taxes.

It’s likely that some, most or possibly all of the forecasts above will be wide of the mark in some degree. GMI’s projections, however, are expected to be somewhat more reliable vs. the estimates for the components. Predictions for the specific markets (US stocks, commodities, etc.) are subject to greater volatility and tracking error compared with aggregating the forecasts into the GMI estimate, a process that may reduce some of the errors through time.

Another way to view the projections above is to use the estimates as a baseline for refining expectations. For instance, the point forecasts above can be adjusted with additional modeling that accounts for other factors not used here. Customizing portfolios for a specfic investor, to reflect risk tolerance, time horizon, and so on, is also recommended.

For perspective on how GMI’s realized total return has evolved through time, consider the benchmark’s track record on a rolling 10-year annualized basis. The chart below compares GMI’s performance vs. the equivalent for US stocks and US bonds through last month. GMI’s current return for the past ten years is 8.9%, a robust performance.

Long-Run Forecasts Put US Equities, Commodities Behind Other Assets_2

Here’s a brief summary of how the forecasts are generated and definitions of the other metrics in the table above:

BB: The Building Block model uses historical returns as a proxy for estimating the future. The sample period used starts in January 1998 (the earliest available date for all the asset classes listed above). The procedure is to calculate the risk premium for each asset class, compute the annualized return and then add an expected risk-free rate to generate a total return forecast.

For the expected risk-free rate, we’re using the latest yield on the 10-year Treasury Inflation Protected Security (TIPS). This yield is considered a market estimate of a risk-free, real (inflation-adjusted) return for a “safe” asset — this “risk-free” rate is also used for all the models outlined below. Note that the BB model used here is (loosely) based on a methodology originally outlined by Ibbotson Associates (a division of Morningstar).

EQ: The Equilibrium model reverse engineers expected return by way of risk. Rather than trying to predict return directly, this model relies on the somewhat more reliable framework of using risk metrics to estimate future performance. The process is relatively robust in the sense that forecasting risk is slightly easier than projecting return. The three inputs:

* An estimate of the overall portfolio’s expected market price of risk, defined as the Sharpe ratio, which is the ratio of risk premia to volatility (standard deviation). Note: the “portfolio” here and throughout is defined as GMI

* The expected volatility (standard deviation) of each asset (GMI’s market components)

* The expected correlation for each asset relative to the portfolio (GMI)

This model for estimating equilibrium returns was initially outlined in a 1974 paper by Professor Bill Sharpe. For a summary, see Gary Brinson’s explanation in Chapter 3 of The Portable MBA in Investment. I also review the model in my book Dynamic Asset Allocation. Note that this methodology initially estimates a risk premium and then adds an expected risk-free rate to arrive at total return forecasts. The expected risk-free rate is outlined in BB above.

ADJ: This methodology is identical to the Equilibrium model (EQ) outlined above with one exception: the forecasts are adjusted based on short-term momentum and longer-term mean reversion factors. Momentum is defined as the current price relative to the trailing 12-month moving average. The mean reversion factor is estimated as the current price relative to the trailing 60-month (5-year) moving average.

The equilibrium forecasts are adjusted based on current prices relative to the 12-month and 60-month moving averages. If current prices are above (below) the moving averages, the unadjusted risk premia estimates are decreased (increased). The formula for adjustment is simply taking the inverse of the average of the current price to the two moving averages.

For example: if an asset class’s current price is 10% above its 12-month moving average and 20% over its 60-month moving average, the unadjusted forecast is reduced by 15% (the average of 10% and 20%). The logic here is that when prices are relatively high vs. recent history, the equilibrium forecasts are reduced. On the flip side, when prices are relatively low vs. recent history, the equilibrium forecasts are increased.

Avg: This column is a simple average of the three forecasts for each row (asset class)

10yr Ret: For perspective on actual returns, this column shows the trailing 10-year annualized total return for the asset classes through the current target month.

Spread: Average-model forecast less trailing 10-year return.

Source: investing

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Thomas

Economic

Job openings ticked down in July to levels rarely seen since the Covid pandemic, bolstering fears of cooling in the labor market.

The Job Openings and Labor Turnover report showed around 7.18 million listings in July, according to data from the Bureau of Labor Statistics released Wednesday. That's only the second reading under the 7.2 million level since the end of 2020.

Wednesday's print was the lowest since September 2024, when just over 7.1 million openings were reported. Outside of that blip lower last year, these job opening levels were last seen when the pandemic was causing an upheaval of the U.S. economy and labor force.

The data also underscored rising concerns of weakening in the labor market, a trend that has shown up in anecdotal evidence for several months. "This is a turning point for the labor market. It's yet another crack. It's also troubling that July saw fewer health care and social assistance job openings."

"This is yet another data point underscoring how this job market is frozen and it's difficult for anyone to get a job right now," said Heather Long, chief economist at Navy Federal Credit Union.

Weekly jobless claims data due on Thursday will offer the next round of insight into the health of the job market. Then, attention turns to the closely followed jobs report on Friday morning.

Source: CNBC

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Adam

Bond

Long-dated borrowing costs around the world are back under pressure, and analysts say that’s in part thanks to broad investor unease with the path of both fiscal and monetary policy in many major economies.

Bond markets have been on a bumpy ride this year, with massive spikes and falls at times stemming from White House policymaking, ranging from tariffs to concerns about the U.S. deficit related to the “big, beautiful tax bill.”

Moves have been more measured this week. But several yields hit notable milestones, reigniting discussion over the opportunities and risks in government debt.

The U.S. 30-year Treasury yield nudged above 5% on Wednesday morning for the first time since July amid questions over the future of tariff revenues following a recent court ruling. Japan’s 30-year bond yield was at a record high on Wednesday, with a 100 basis point rise this year driven by high inflation, low real rates and political uncertainty.

The yield on U.K. 30-year bonds on Tuesday reached its highest level since 1998 ahead of a highly anticipated budget set to be delivered in the coming months, and added another 4 basis points early Wednesday. The premium on French 30-year bonds breached a level last seen in 2008 as the government is on the brink of collapse, putting the country’s deficit reduction plans at risk.

German bonds, which benefited from a flight to safety earlier in the year, joined the rout, with the 30-year bund yield notching a 14-year high.

Rate pressure

Kallum Pickering, chief economist at Peel Hunt, said that while there is no crisis in the bond market, the elevated price being paid by governments, combined with high interest rates, is an economic problem across the advanced world.

″[High rates] constrain policy choices, they crowd out private investment, they leave us wondering every six months whether we’re going to face a bout of financial instability. These are really, really bad for the private sector,” Pickering told CNBC’s “Squawk Box Europe” on Wednesday.

“I’m actually getting to the point now where I think that austerity would be stimulative, because you would actually give markets confidence, you would bring down these bond yields, and the private sector would just breathe a sigh of relief and start distributing some of its balance sheet strength.”

Jonas Goltermann, deputy chief markets economist at Capital Economics, said there appears to be three overlapping drivers between the global move higher in long-end yields: fiscal concerns, monetary policy, and term premia effects such as supply-demand dynamics.

Both the U.K. and France are facing a “tricky budget arithmetic” in which “some combination of tax increases and spending cuts are needed to keep public finances on a sustainable footing and bond markets on side,” he said in a Tuesday note.

Market dynamics, meanwhile, suggest wavering confidence over central banks’ “ability and willingness to keep inflation under control in the medium term,” Goltermann continued, though he noted the relative resilience of U.S. yields where fears over central bank independence have become acute.

Finally, a combination of greater bond issuance and lower demand from traditional buyers of long-dated debt — in part due to the risk of higher rates and inflation, and a weakening of the typical link between risk-off sentiment and lower bond yields — has left the chance of a “silver bullet” arriving to drive down yields looking slim, Goltermann said.

Finally, at a time when bond issuance has increased, demand from traditional buyers of long-dated debt has decreased, Goltermann continued. The typical link between risk-off sentiment and lower bond yields has eroded this year, and traders are weighing the risk of higher rates and inflation, he said.

Strategists at ING downplayed the idea that this week’s bond sell-off was sparked by U.S. tariff uncertainty related to an appeals court decision that most of President Donald Trump’s duties on imports from other countries are illegal.

“There is no uncertainty. Tariffs remain and will remain,” they said in a Tuesday note, describing the Trump administration as “all in on macro management via tariffs” by whatever means.

“The long ends of yield curves remain under upward pressure amid a mix of fiscal concerns and worries about central bank independence,” they said, particularly following the “Lisa Cook affair” — referring to Trump’s ongoing attempt to fire the Federal Reserve governor.

“Who takes the lead on a given day seems influenced by supply activity,” they added.

Source: cnbc

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Winkelmann

Economic

Forex

Political

President Donald Trump says he’s not looking at lowering tariffs on India, one week after the US doubled levies on the country’s imports to 50% as punishment for its Russian oil imports.Trump responded “no” when asked by a reporter whether he is considering taking away some of the tariffs imposed on India.“We get along with India very well,” Trump added Tuesday at a White House event, but criticised what he said was an imbalanced trade relationship with New Delhi because of high Indian levies.

“India has, you have to understand, for many years, it was a one-sided relationship,” he said. “India was charging us tremendous tariffs, about the highest in the world.”The US tariffs on India came despite months of negotiations between New Delhi and Washington and stunned officials in the Asian nation. India’s high tariffs and protectionist policies have exasperated US trade negotiators.Trump set a 25% duty on Indian exports but doubled that level to 50% last week as punishment for purchases of Russian oil. Those levies hit more than 55% of goods shipped to the US, which is India’s biggest market.

Trump has expressed frustration over India’s continued purchases of Russian energy, which New Delhi has justified as necessary to keep its oil prices low. Critics say such energy buys by India and China help keep Russia’s economy afloat and undercut sanctions against Moscow aimed at reining in the country’s military machine and bringing an end to the war in Ukraine.The US president said he was “watching very closely” to see how Russian President Vladimir Putin addressed efforts to set up a meeting with his Ukrainian counterpart and insinuated he was considering additional measures if talks did not progress.

Trump on Monday said that India had offered to cut its tariffs “to nothing” in a social media post, without saying when that offer was made or whether the White House plans to reopen trade talks with India.“It’s getting late. They should have done so years ago,” Trump said on Monday.