CAPITALDIGEST MARKET REVIEW, 07/09/2026
September 7, 2026
DOLLAR SLIPS, WITH TRADERS ALREADY EYEING FRIDAY JOBS
The dollar edged lower on Monday in a relatively subdued session, as the futures market raised odds on a September interest-rate hike following last week’s hawkish remarks from Federal Reserve Chairman Kevin Warsh. The market is already gearing up for key U.S. jobs data due later this week following Warsh’s commentary. The July jobs release showed an unexpected drop in hiring, reducing expectations that the Fed would raise rates. Friday’s report on August hiring is expected to show that employers added 55,000 jobs during the month, according to the median estimate of economists polled by Reuters. “If we get an outright decline in jobs, I don’t see how the Fed can raise interest rates. I don’t think that they’ve ever raised interest rates after the economy had back-to-back job losses,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. The euro rose 0.27% to $1.1615, while sterling strengthened 0.07% to $1.3544. Both currencies remained on track for a second consecutive month of gains. The dollar index , which measures the U.S. currency against six major peers, was down 0.24% at 99.43 after hitting 99.73 on Friday, its strongest since August 17. The index remains on track for a second consecutive monthly decline after U.S. Treasury bond-buyback plans earlier in the month revived debasement trades. The U.S. central bank will “have work to do” if policymakers do not get the confidence they need that inflation is heading down to 2%, Warsh said on Friday, in his clearest indication yet that further tightening may be needed to curb price pressure. “Warsh’s prepared remarks seemed designed to lift rate-hike expectations, rebalance the September debate towards the hawks and rebuild his inflation-fighting credibility,” said Elwin de Groot, head of macro strategy at Rabobank. The Fed next meets on September 15-16, with fed funds futures traders currently pricing in 64% odds of a September rate hike, up from around 35% before Warsh’s comments on Friday. August’s producer price inflation report is due on September 10 and consumer price inflation for the month is scheduled for September 11. Warsh on Monday told G20 finance leaders that the world is seeing a global investment surge that is helping to power growth, reversing past savings gluts that kept capital idle due to a shortage of investment opportunities.
STERLING TICKS UP FROM THREE-WEEK LOW AS YEN RALLIES AND OIL COOLS
The pound rose slightly on Thursday after hitting a three-week low the previous day, getting a lift from a sharp rally in the yen that knocked the U.S. dollar as well as a calming of oil prices. Sterling climbed 0.1% to $1.35, having fallen to a three-week low of $1.348 in the previous session as the safe-haven dollar rose following renewed strikes between the U.S. and Iran. Yet a jump in the yen — which analysts said reflected rising Bank of Japan rate hike bets, although they remained alert to the risk of official intervention — caused the dollar to fall across the board on Thursday. Meanwhile oil prices slipped from a more than one-month high after a calmer day in the Middle East, helping Brent crude fall 1% to $95 a barrel. The pound was little changed against the euro, with the euro zone’s currency buying 85.93 pence. A selloff in global bond markets which pushed Britain’s benchmark 10-year yield to its highest level since 2007 on Wednesday abated on Thursday, with the yield down more than 3 basis points. The jump in yields, a proxy for government borrowing costs, has eroded some of the government’s so-called headroom against its fiscal rules, a headache for new Prime Minister Andy Burnham as his finance minister John Healey prepares to present a budget in October. Markets have raised their bets on rate hikes around the world as the U.S.-Iran conflict has again pushed up energy prices, with traders now fully pricing in a Bank of England rate hike by the end of the year and another by March. Mark Haefele, UBS Global Wealth Management chief investment officer, said sterling looks attractive in a note to clients on Thursday. “We… continue to view sterling positively, supported by improving confidence in UK assets, a more fiscally credible political backdrop, and the potential for investors to reduce still substantial short positions.” He added that higher yields on UK bonds also boost the appeal of the pound. Sterling has risen very slightly this year against the dollar, while the euro has fallen more than 1%, supported by some signs that the UK economy is faring better than expected.
POUND SLIPS DESPITE JUMP IN GILT YEILDS AS INVESTORS FAVOUR DOLLAR
Sterling slipped on Tuesday as investors returned from a long holiday weekend to a global bond selloff that pushed British government borrowing costs to their highest since 2008 and bolstered the dollar. The pound dipped by 0.07% to 1.35395 against a broadly stronger U.S. currency after a renewed flare-up in U.S.-Iran hostilities that revived inflation concerns. Hawkish remarks from Federal Reserve Chair Jerome Powell on Friday had also prompted traders to raise expectations of an increase to U.S. interest rates. A stronger dollar has pushed sterling about 1% below the six-month high of $1.36745 hit late last month, with the focus turning to parliament’s return this week as investors look for clues on how new Prime Minister Andy Burnham will fund his plans ahead of the October budget. Britain’s strained public finances remain a key concern, with gilt yields among the highest in the developed world and markets sensitive to any changes in the fiscal outlook. British 10-year gilt yields rose to their highest since June 2008 at 5.2554% as oil prices topped $92 a barrel. The Bank of England is widely expected to leave interest rates unchanged at 3.75% this month, though markets continue to price in a quarter-point increase by the end of the year. Governor Andrew Bailey said on Friday that he saw little evidence that the recent jump in energy prices was generating lasting inflation pressures. “The Bank of England is uncertain how transitory the price shock will be,” said Commerzbank FX analyst Michael Pfister. British retailers raised prices by the most in more than two years last month as higher energy prices pushed up the cost of some processed food and the AI boom raised the cost of consumer electronics, data showed on Monday. Economic data on Tuesday painted a mixed picture. Britain’s manufacturing activity in August expanded at its slowest pace since March while BOE data showed that lenders approved the fewest mortgages in July since January 2024. The economy remains resilient, however, with GDP rising 0.3% in the latest month and 0.4% over the latest three-month period.
DOLLAR GAINS AS OIL, RISING BOND YEILDS STOKE INFLATION FEARS
The dollar strengthened on Tuesday as renewed U.S.-Iran hostilities sent oil prices higher, fuelling inflation worries and sparking a global bond selloff. The U.S. launched new air strikes on Iranian targets on Tuesday, pushing oil prices up over 4%. The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, rose 0.27% to 99.68, with the euro down 0.23% at $1.1589. The 10-year Japanese government bond yield touched 3% for the first time in 30 years, while the yield on 10-year Treasury notes hit its highest since January 2025. Higher yields drive investors to buy safe-haven currencies like the U.S. dollar while undermining the case for riskier assets like equities. “A rout in global bond markets is intensifying and the dollar is climbing as an outbreak in hostilities between the U.S. and Iran revives inflation risks, raises the likelihood of interest rate hikes in the months ahead, and makes safe havens more appealing,” said Karl Schamotta, chief market strategist at Corpay. Fed funds futures traders are now pricing in 68% odds of a September rate hike, up from 35% before Federal Reserve Chairman Kevin Warsh’s hawkish speech on monetary policy at the Jackson Hole symposium on Friday. He said the Fed would “have work to do” if inflation failed to cool, his strongest hint yet that further rate hikes could be needed to contain price pressures. August’s jobs and consumer price inflation data, both due before the Fed’s September 15 to 16 meeting, may be key to whether the U.S. central bank hikes next month. This Friday’s jobs report is expected to show that employers added 56,000 jobs last month, according to the median estimate of economists polled by Reuters. Fed Governor Michael Barr said on Tuesday that if inflation does not cool quickly, it will be time, opens new tab for the U.S. central bank to increase interest rates. U.S. Treasury Secretary Scott Bessent, meanwhile, said on Tuesday that U.S. bond yields are showing that inflation expectations are “flat to down” and reflect accelerating U.S. growth. Sterling weakened 0.26% to $1.3511.
STERLING HITS 3-WEEK LOW VERSUS DOLLAR, MIDDLE EAST AND GILTS IN FOCUS
Sterling hit a three-week low against a strengthening dollar on Wednesday as investors kept a close watch on the conflict in the Middle East and renewed selling pressure in the gilt market. The U.S. and Iran were back on a war footing on Wednesday after the most significant exchange of fire in weeks. UK government bond yields hit fresh 18-year highs, adding to the challenge facing finance minister John Healey ahead of his first budget. The British pound was down 0.05% to $1.3510 after reaching $1.3490, the lowest level since August 14. The greenback hit a two-week high as investors turned to the U.S. currency amid growing concerns about the energy shock and weighed diverging monetary policy paths across major economies. Healey will present his first budget on October 28 and has pledged to stick to the borrowing rules he inherited from his predecessor Rachel Reeves. “One-month implied volatility in sterling has fallen to more than 12-year lows, though we expect that to prove a floor for some time given brewing budget jitters,” said Matthew Ryan, head of market strategy at Ebury. “This rise in yields, which will eat directly into the government’s fiscal headroom, raises the risk of tax hikes in the autumn, even before accounting for any additional spending increases that Burnham seems likely to pursue,” he added. The euro fell 0.05% to 85.72 pence. The Bank of England rate path remained in the background with the BoE widely expected to leave rates unchanged at 3.75% this month, and markets pricing in a quarter-point increase by the end of the year. “The cocktail of higher inflation, household inflation expectations and a stabilising labour market reduces the need for less restrictive policy,” Sanjay Raja, chief UK economist at Deutsche Bank, said, after flagging that his base case remains for no change to the Bank Rate. “We think the debate around whether rates remain sufficiently restrictive will gather momentum in the coming months.”