CAPITALDIGEST MARKET REVIEW, 28/09/2026

STERLING TREADS WATER AT 3-MONTH LOW AFTER WEEKLY DROP ON DOLLAR RALLY

The pound held steady on Friday at around its lowest in just under three months against the euro and dollar, with the US currency ​set for a second sharp weekly increase on rising energy prices ‌and rate hike bets. Sterling was little changed at $1.322, after falling to $1.32 on Thursday, its lowest since June 29. Britain’s currency was on track to fall 1.2% against the dollar in its biggest ​one-week fall since May, after declining 1% the previous week. The dollar has ​rallied this week as traders raised their bets on further rate ⁠hikes from the US Federal Reserve. Rising energy prices as conflict in the Middle ​East disrupts energy flows, as well as strong economic growth, have prompted Fed officials to ​talk up the chances of more rate increases after the central bank raised borrowing costs last Wednesday. The Bank of England held rates steady last week, in contrast with the Fed and European Central ​Bank, although it flagged the possible need for increases should the US-Israeli war on ​Iran drag on. Expectations of higher interest rates tend to push up yields on a country’s bonds, ‌making ⁠them more attractive and raising demand for the currency. The pound eased against the euro to its lowest in three months, with the euro zone’s currency reaching 86.11 pence . Francesco Pesole, currency strategist at ING, said the pound is likely to struggle in ​the coming months ​as it is ⁠doubtful the BoE will hike interest rates sharply. “It seems unlikely the BoE will match market expectations for further tightening, meaning ​some large dovish repricing should still occur at some point,” he ​said. Traders ⁠in money markets expect around 35 basis points of monetary tightening from the BoE this year and more than 100 basis points by the end of 2027, although economists ⁠broadly ​expect much more limited action. Markets also expect around ​100 basis points of further tightening by the end of next year from the ECB, which has ​already raised interest rates twice this year.

DOLLAR ASCENDS TO FRESH 2-MONTH HIGH ON INFLATION WORRY, FED HIKE EXPECTATION

The dollar hit a fresh two-month high on Thursday as Treasury yields rose and expectations of further Federal Reserve interest ​rate hikes strengthened after hawkish remarks from several central bank officials and solid economic data. Treasury yields continued to climb after sharp moves in ‌the prior session, with the 30-year US bond yield at its highest since June 2004 and the benchmark 10-year note at its highest in nearly two decades following economic data that indicated a jump in business activity along with mounting price pressures. Data on Thursday showed weekly initial jobless claims dipped by 1,000 to 197,000, below the 201,000 estimate of economists polled ​by Reuters, indicating a steadying labor market. Adding to inflation concerns, oil prices were up almost 4% in choppy trading after a Houthi missile attack ​on Saudi Arabia revived supply disruption fears, although gains eased on reports the US and Iran discussed reopening the ⁠Strait of Hormuz. Since the central bank’s rate hike of 25 basis points last week to the 3.75%-4.00% range, several Federal Reserve officials have flagged the ​possibility of more rate increases if inflation does not moderate. “We’ve got the two-year at the top of a post-2008 range, and we’ve got the 30s that are ​22-year high, and the ten-year at a 19-year high. I don’t think FX traders need to know too much more than that,” said Joseph Trevisani, senior analyst at FXStreet in New York. “The Fed knows that this is a supply shock for oil, they’re looking beyond that, one of the things they’re looking at is the projected growth from the ​economy in the third quarter.” The dollar index , which measures the greenback against a basket of currencies, was on track for a fourth straight daily advance ​as it rose 0.15% to 101.28 after hitting 101.39, its highest since July 29. Comments from several Fed officials on Thursday reinforced the need ‌to combat ⁠inflation, with New York Federal Reserve President John Williams and Philadelphia Fed President Anna Paulson noting that more rate increases were likely needed. Expectations for a rate hike of at least 25 basis points at the Fed’s October meeting stood at 68.6%, up from 55.4% a week ago, according to CME FedWatch, opens new tab.

EUROPEAN CURRENCIES UNDER PRESSURE

The euro was off 0.07% at $1.1372 after falling to $1.1358, its lowest since July 28. European Central Bank board member Isabel Schnabel resigned on Thursday to take on a senior ​role at the International Monetary Fund, ​kicking off a lengthy reshuffle atop ⁠Europe’s most powerful financial institution. Norway’s central bank raised interest rates on Thursday and Sweden’s signaled it was likely to follow suit before the end of the year, as central bank policymakers around the world grapple with rising inflation from a ​war-driven energy shock. Against the Norwegian crown, , the dollar strengthened 0.33% to 9.51 while the Swedish crown weakened 0.1% ​versus the dollar to ⁠9.921. Against the Swiss franc , the dollar strengthened 0.34% to 0.828 after climbing to 0.8296, its highest since May 2025. The Swiss National Bank stood apart from other central banks by keeping its benchmark interest rate on hold and stating that rising inflation caused by war in the Middle East was not a threat to Swiss price ⁠stability. The Japanese ​yen weakened 0.32% against the greenback to 158.82 per dollar after Japanese Finance Minister Satsuki ​Katayama said the principles underpinning the coordinated Japan-US currency intervention in July remain intact, but sentiment remained fragile after last week’s Bank of Japan rate hike did not convince investors that a faster tightening cycle is ​in store.

POUND CAUGHT IN THREE-DAY SLIDE ASDOLLAR RALLIES BROADLY

The pound fell for a third day on Wednesday, driven lower by the strength of the dollar, which got a lift from investors ​pricing in a higher chance of a string of US rate ‌rises over the coming months, even as the oil price trades below $100 a barrel. Sterling was around $1.328, down 0.45% on the day, even with oil futures dropping below $99 again, as investors ​clung on to evidence that supply from the Middle East was ​slowly improving, while optimism grew over a possible diplomatic breakthrough between the ⁠US and Iran. Growth in British business activity cooled this month and inflation pressure built, ​a survey showed on Wednesday, an awkward backdrop for finance minister John Healey ​ahead of his first budget in October. The S&P Global UK Services Purchasing Managers’ Index (PMI) fell in September to 51.7 from 52.5 in August, a three-month low, according to “flash” or preliminary ​data. A Reuters poll of economists had pointed to a reading of 52.0. “Growth ​in Britain’s economy has been remarkably resilient so far this year, though we think that ‌a ⁠slowdown is almost inevitable during the remainder of the year – energy costs have risen, borrowing costs are up, the jobs market continues to weaken and political uncertainty looks set to rear its ugly head again as we approach budget day ​next month,” Matthew ​Ryan, head of ⁠market strategy at Ebury, said. “We expect this to keep sterling under pressure in the near-term, though we do contend that ​sterling appears a bit oversold at current levels.” Money markets ​show traders ⁠expect UK rates to be around a full percentage point above the current rate of 3.75% this time next year, which would imply four quarter-point hikes between now ⁠and ​then. They assign roughly a 65% chance of a ​rate rise at the BoE’s November meeting, which falls right after the Autumn Budget, with a ​December hike seen as a done deal .

DOLLAR RISES IN CHOPPY TRADING AS INVESTORS WEIGH INFLATION PROSPECTS

The dollar rose in uneven trading on Tuesday, oscillating between gains and losses after hitting a two-month high earlier in ​the day as volatile oil prices clouded the inflation picture. Oil prices settled down about 1%, pulling back from earlier highs, after US ‌President Donald Trump told reporters at the United Nations that US officials had had a “very good” three-hour meeting on Tuesday with the Iranian delegation. Crude prices earlier fell to a two-week low following Iran’s proposal to reopen the Strait of Hormuz within seven days if the US eases military pressure and after Iran and the United States hinted at the prospect of reviving ​negotiations to end their conflict. But the early optimism was dented after Trump said during a speech to the United Nations General Assembly that he ​thought the US would reach a deal with Iran after the midterm elections are held in early November, which pushed ⁠oil and the dollar higher. “Obviously, the big bogeyman for everybody is inflation, but it’s all been about why is there so much inflation?” said Juan ​Perez, senior director of trading at Monex USA in Washington. “It’s all due to the Iranian conflict going on so long, the escalation. So this is where ​markets are right now, and this is why you’re seeing the dollar not really have any clear direction.” The dollar index , which measures the greenback against a basket of currencies, rose 0.17% to 100.59, with the euro down 0.18% at $1.1441. The dollar index had risen as much as 0.29% on the day to 100.70, its highest ​since July 30, while also falling as much as 0.11%. The ongoing US-Israeli war on Iran had sent oil prices higher and fanned inflation worries, prompting ​rate hikes from several central banks in recent days, including the Federal Reserve, but recent optimism over a potential deal has pushed oil prices back below the $100 per barrel ‌mark. Comments from ⁠Fed officials in the wake of its policy decision have also flagged the possibility of more rate increases if inflation does not cool. Federal Reserve Bank of Boston President Susan Collins wrote on Tuesday in a LinkedIn post that she supported last week’s central bank interest rate increase amid the risks that future inflation will be above its 2% target. Separately, Richmond Fed President Tom Barkin said economic conditions in the US may be firming, and inflation pressures are coming from more than just ​higher energy costs and tariff effects. Analysts ​at Morgan Stanley said in a ⁠note that options pricing data in the week ending September 18 indicated that investors increased long positions in the dollar index and increased short positions in the euro. Markets are roughly split on whether the Fed will raise rates ​at its October meeting, pricing in a 55.4% chance for a hike of at least 25 basis points, down ​from 57.6% in the ⁠prior session, according to CME FedWatch, opens new tab.