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Traders around the world, including in the US after Labour Day, have swapped their loungers for office chairs and governments were made well aware. Risk premia are back with a vengeance after a relatively calm summer period. The ultralong end of the curve is underperforming and the UK is once again lagging peers. The story is plain and simple: highly indebted countries keep on making deficits in a fundamentally different interest rate environment without massive central bank buying and with markets instead demanding higher compensation for increasing (credit) risks. The UK case stands out ever since the Truss-Kwarteng mini budget debacle in 2022. And going into this October’s budget, finance minister Reeves faces a trilemma of upholding the self-imposed fiscal straightjacket, keeping her spending commitments (or said otherwise: no meaningful spending cuts) while holding to her promise not to raise taxes again. Something’s got to give and the gilt market fears it’s going to be the first one. The 30-year UK yield adds 6 bps, launching the closely watched tenor towards the highest level since 1998. Other maturities add between 1.6-5.1 bps. The fiscal tidal wave is coming for everyone and since the spending U-turn announced by Merz early March, that includes German Bunds. Its 30-year tenor rose to 3.4%, the highest level in 14 years. The 30-year European (swap) equivalent is on the verge of topping 3% for the first time since November 2023. The US is no different (even though no one is talking about the BBB anymore), resulting in daily yield changes of 4.4-5.4 bps. Watch for the 30-year (4.97%) over there to hit 5% near-term. Similar-dated Japanese bond yields have added 2.7 bps but are bound to rise further in tomorrow’s Asian session after missing out on part of the intraday rise in the other regions. The core bond selloff triggers broader risk aversion, notably in equity markets. European stocks shed 1.4%. Main indices on Wall Street drop up to 1.5% (Nasdaq) at the open. The US dollar emerges as the main beneficiary on currency markets. Losing a safe have appeal doesn’t happen overnight, of course, but is a slow process of gradual erosion. The greenback gains against all of the important peers, most notably against sterling. GBP/USD suffers a double whammy with the pair dropping from 1.354 at the open to 1.337 currently. EUR/USD eases to 1.164 but in a move far from technically significant. The pair has room for further declines towards the 1.14(3) area before things get tricky. The trade-weighted dollar index rebounds to 98.4, up from 97.6 at the open. Fiscal worries also weigh on the yen (USD/JPY 148.5), preventing it from fulfilling its safe haven status. Gold, on the other hand, does. The precious metal looked through the yield increase to briefly hit a new all-time high. The US manufacturing ISM is still up for release after this report but it’s unlikely it’ll alter the current market moves.

News & Views

Hungarian Q2 GDP growth was confirmed at 0.4% Q/Q and 0.1% Y/Y today. From a production point of view, valued added in construction was 4.3% higher Y/Y and activity in services rose 1.3% Y/Y. Industrial activity (-3.3% Y/Y) and agriculture (-11.4% Y/Y) contributed negatively to growth. Considering an expenditure point of view, household consumption rose 1.8% Q/Q (was 0.1% in Q1) and 4.5% Y/Y. Government consumption rose 1.2% Q/Q and 9.8% Y/Y. On the other hand, gross fixed capital formation declined 1.9% Q/Q and -7.0% Y/Y. Exports declined 0.9% Y/Y as imports rose 4.0% Y/Y, resulting in a negative contribution of 3.4 ppts to yearly growth. Hungarian swap yields today add about 3-5 bps across the curve. This is probably driven by the overall market focus on fiscal sustainability, and higher risk premia rather than on data published today. The forint declines, albeit mildly, given the overall risk-off context (EUR/HUF 395.75).

According to Bloomberg referring to remarks from Michl after his trip to the Jackson Hole meeting, the CNB governor supported the recent process to reduce interest rates, but indicated that monetary policy should avoid holding borrowing cost extremely low for a long period. Michl was said to support the view that without fiscal reforms and in a context with an aging population and rising government debts, central banks will have to hold rates higher than in the period before the pandemic. Michl distanced himself from previous policy of currency interventions, including a bigger CNB balance sheet and negative real interest rates, and indicated this will have to be offset by relatively higher interest rates than before.

US manufacturing showed tentative signs of stabilization in August, with ISM Manufacturing PMI rising to 48.7 from 48.0, slightly above expectations of 48.6. Despite the improvement, the index remained in contraction for the sixth consecutive month, highlighting the strain from weak global demand and tariff-related pressures.

New orders provided a bright spot, jumping to 51.4 from 47.1 to expand for the first time since January. Export orders also improved slightly from 46.1, though they remained in contraction at 47.6. Imports weakened further from 47.6 to 46.0, while production slipped back into contraction at 47.8, down from 51.4, its first decline since May.

Labor market conditions remained fragile, with the employment index at 43.8, up from 43.4, marking a seventh straight month of contraction. Price pressures moderated slightly, with the index easing to 63.7 from 64.8, though tariff-driven increases in steel and aluminum continued to filter through supply chains, keeping costs elevated across the sector.

Overall, ISM noted that 69% of manufacturing GDP contracted in August, down from 79% in July. The PMI’s historical relationship with GDP suggests the latest reading corresponds to an annualized real GDP growth rate of about 1.8%. While the headline index remains weak, the rebound in new orders offers a glimmer of optimism that activity may be bottoming out.

Full US ISM manufacturing release here.

Traders are getting back to their desks after a prolonged weekend – Both the United States and Canada were celebrating Labor Day yesterday.

The week prior to Labor Day tends to see slower movement and thinner volumes and despite recent volatility, this year was not an exception.

Rangebound conditions have dominated currency markets since Powell's change of tone which shook up rate expectations for the FED – The upcoming Federal Reserve meeting, coming up on September 18, is close to a promised cut (90% of a 25 bps cut priced in).

Volatility is now back on its feet to kick off the month.

With the UK Government bonds opening the week with fresh concerns, a huge selloff in Gilts is leading another rout in the Bond market – With the GBP hurting at the same time.

These concerns combined with a failure from bears to push the Greenback below its prior week range, and rising geopolitical tension around the globe are hurting sentiment.

US Index futures (pre-open for Equities) are in the red and cryptocurrencies attempted a rebound which got rejected – The US Dollar on the other hand is shining.

A past week Dollar Index analysis had emitted the hypothesis that bears had the fundamentals to take control of the action, but their hesitancy paints another picture.

Is a longer-run rebound close?

We'll take a look at that right now.

An overlook at the daily picture in the FX Market

FX Market overview – September 2, 2025 – Source: Finviz

Dollar Index technical outlook

DXY Daily chart

Dollar Index Daily chart, September 2, 2025 – Source: TradingView

The US Dollar is putting up a strong bull candle ahead of today's ISM US Manufacturing report (coming up at 10:00 A.M.)

Despite the current data having the potential to influence the current flows, it seems that currency markets are more looking at US bond yields that are strengthening while Index futures are weakening – this underpins the USD.

Hanging around the higher timeframe 98.00 Pivot zone, the rebound is exacerbated by hesitant USD sellers – with bets on a lower dollar increasing since Jackson Hole, you can expect a failed move to see reversals like the one from today.

RSI is still neutral but rising, however one thing to keep in mind is that the Friday Non-Farm Payrolls report will have the most influence on the future price action for all markets and particularly in the US.

DXY 4H chart

Dollar Index 4H chart, September 2, 2025 – Source: TradingView

Looking closer to the 4H Chart, it seems that rangebound conditions still have a high possibility of holding – As I write this piece, mean-reversion USD sellers have appeared at the upper bound of the prior week range.

Held in a range between 97.60 lows to around 98.80 since the 11th of August, participants have tried without success to provide meaningful direction to the Greenback.

As always, the Non-Farm Payrolls report is making every participants hold their breath.

Levels to watch for the Dollar Index (DXY):

Support Levels:

• 98.00 Pivot (key for immediate momentum, immediate support)
• Lower bound of the upward channel 97.60 to 97.80
• 2025 Lows Major support 96.50 to 97.00

Resistance Levels:

• US Dollar range Highs 98.82
• 98.50 to 98.80 Resistance Zone
• Mid-line of the ascending channel and psychological level 99.50
• 100.00 Main resistance zone

Dollar Index 1H chart

Dollar Index 1H chart, September 2, 2025 – Source: TradingView

It will be interesting to spot if players want to prolong the already extensive moves in FX after the upcoming US ISM Manufacturing report.

Don't forget to log in for our headline piece.

Safe Trades and successful week!

Daily Pivots: (S1) 1.3510; (P) 1.3530; (R1) 1.3566; More...

GBP/USD's fall from 1.3594 resumed by diving through 1.3389 support and intraday bias is back on the downside. Corrective pattern from 1.3787 is extending with another falling leg. Deeper decline would be seen back to 1.3140 support. But downside should be contained by 38.2% retracement of 1.2099 to 1.3787 at 1.3142. But still, for now, risk will stay mildly on the downside as long as 1.3459 resistance holds, in case of recovery.

In the bigger picture, up trend from 1.3051 (2022 low) is in progress. Next medium term target is 61.8% projection of 1.0351 to 1.3433 from 1.2099 at 1.4004. Outlook will now stay bullish as long as 55 W EMA (now at 1.3104) holds, even in case of deep pullback.

Daily Pivots: (S1) 1.1655; (P) 1.1682; (R1) 1.1713; More...

Range trading continues in EUR/USD and intraday bias remains neutral. Overall outlook is unchanged that corrective fall from 1.1829 should have completed with three waves down to 1.1390. On the upside, above 1.1741 will bring retest of 1.1829 high first. Firm break there will resume larger up trend. However, sustained break of 1.1573 will dampen this view, and indicate that corrective pattern from 1.1829 is extending with another falling leg towards 1.1390 again.

In the bigger picture, rise from 0.9534 (2022 low) long term bottom could be correcting the multi-decade downtrend or the start of a long term up trend. In either case, further rise should be seen to 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. This will remain the favored case as long as 1.1604 support holds.

Daily Pivots: (S1) 0.7988; (P) 0.8002; (R1) 0.8019; More….

Intraday bias in USD/CHF remains neutral first. On the downside, break of 0.7984 will resume the fall from 0.8170 to 0.7910 support first, and then retest of 0.7871 low. However, break of 0.8103 resistance will turn bias to the upside to resume the rebound from 0.7871 through 0.8170.

In the bigger picture, long term down trend from 1.0342 (2017 high) is still in progress. Next target is 100% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.7382. In any case, outlook will stay bearish as long as 0.8475 resistance holds.

Daily Pivots: (S1) 146.85; (P) 147.12; (R1) 147.44; More...

USD/JPY's break of 148.76 resistance suggests that pullback from 150.90 has already completed after drawing support from 55 D EMA (now at 147.06). Intraday bias is back on the upside for 150.90, and then 151.22 fibonacci level. Firm break there will carry larger bullish implication. On the downside, however, break of 146.65 support will resume the decline from 150.90 through 146.20 instead.

In the bigger picture, price actions from 161.94 (2024 high) are seen as a corrective pattern to rise from 102.58 (2021 low). Decisive break of 61.8% retracement of 158.86 to 139.87 at 151.22 will argue that it has already completed with three waves at 139.87. Larger up trend might then be ready to resume through 161.94 high. In case the corrective pattern extends with another fall, strong support is expected from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound.

Daily Pivots: (S1) 0.8632; (P) 0.8652; (R1) 0.8665; More...

EUR/GBP's strong rally today solidifies the case that corrective pattern from 0.8752 has completed at 0.8595. Intraday bias is back on the upside for retesting 0.8752. Firm break there will resume whole rally from 0.8221. Next target is 0.8867 fibonacci level. For now, further rise is expected as long as 0.8636 support holds, in case of retreat.

In the bigger picture, the structure from 0.8221 medium term bottom are not impulsive enough to suggest that it's reversing the down trend from 0.9267 (2022 high). But even if it's a correction, further rise could still be seen to 61.8% retracement of 0.9267 to 0.8221 at 0.8867. Nevertheless, sustained trading below 55 W EMA (now at 0.8513) will argue that the pattern has completed and bring retest of 0.8221 low.

Global bond markets came under pressure in European session, led by a sharp selloff in long-dated UK gilts. Yield on UK 30-year surged past 5.65% to its highest in 27 years, breaking above the peak set in April. Investors are increasingly concerned that Prime Minister Keir Starmer’s government may abandon fiscal discipline ahead of the upcoming Budget.

French bonds also came under strain, with the 30-year yield climbing to its highest since 2009 as Prime Minister François Bayrou scrambles to shore up parliamentary support ahead of next week’s confidence vote. U.S. Treasury yields are climbing in tandem, with the 30-year approaching 5%—a level last seen in July.

The catalyst in the UK was Starmer’s reshuffle of his Downing Street team, including the appointment of Darren Jones as chief secretary to the Treasury to manage delivery of priorities. The changes, intended to strengthen economic governance ahead of the Budget, have instead rattled markets, with traders worried about a lack of coherent strategy to revive growth while borrowing continues to swell.

Adding to the unease, speculation has resurfaced that Chancellor Rachel Reeves could be sidelined. Markets have been sensitive to such risks before—when questions arose over Reeves’ position in July, gilt yields spiked on fears she might be replaced by a more left-leaning figure less committed to fiscal prudence. The latest political maneuvering has revived those anxieties.

The immediate market reaction suggests little confidence in the government’s direction. Investors are interpreting the moves as paving the way for more gilt issuance, higher inflation, and weaker commitment to fiscal rules. Expectations are building that the Budget could lean heavily on borrowing to fund spending promises rather than tax hikes, amplifying the pressure on long-dated debt.

In currency markets, Sterling has been the weakest performer of the day, weighed down by fiscal and political concerns. Yen and New Kiwi followed on the downside, while Ddollar rebounded on support from rising Treasury yields. Loonie and Swiss Franc also gained, while Euro and Aussie traded mid-pack.

In Europe at the time of writing, FTSE is down -0.60%. DAX is down -1.57%. CAC is down -0.31%. UK 10-year yield is up 0.077 at 4.831. Germany 10-year yield is up 0.044 at 2.794. Earlier in Asia, Nikkei rose 0.29%. Hong Kong HSI fell -0.47%. China Shanghai SSE fell -0.45%. Singapore Strait Times rose 0.52%. Japan 10-year JBG yield fell -0.019 to 1.606.

ECB’s Schnabel sees no need for more easing, eyes higher inflation risks

ECB Executive Board member Isabel Schnabel pushed back against further monetary easing, telling Reuters that policy maybe already “mildly accommodative” and that she sees no case for another rate cut at present. She noted that the economy has held up better than expected, underpinned by robust domestic demand and bolstered by a "significant fiscal impulse" from Germany’s investment plans in infrastructure and defense.

Schnabel also argued that global tariffs imposed by the Trump administration are likely "on net inflationary", even without EU retaliation. “If you have an increase in input prices globally due to tariffs, and these propagate through global production networks, this will increase inflationary pressures everywhere,” she said.

Schnabel also dismissed concerns that a stronger Euro might weigh heavily on price dynamics. She said currency appreciation tied to improving Eurozone growth prospects would have a more limited pass-through, adding, “I am less concerned about exchange rate developments.” She stressed that she sees little chance of inflation expectations de-anchoring to the downside after years of price overshoots.

Looking forward, Schnabel warned that a more fragmented world with tighter supply chains, higher fiscal spending, and aging populations is structurally inflationary. In such an environment, she argued, "central banks around the world start to hike interest rates again may come earlier than many people currently think."

Eurozone CPI ticks up to 2.1%, core stays 2.3%

Eurozone headline inflation inched higher in August, with the flash CPI rising to 2.1% yoy from 2.0% yoy, in line with expectations. The increase came largely from a slower drag in energy prices, though food and services inflation moderated slightly from July levels.

Core CPI, excluding food, energy, alcohol, and tobacco, remained unchanged at 2.3% yoy, defying expectations of a slight dip to 2.2% yoy. The measure has now held steady since May.

By component, food, alcohol and tobacco continued to drive the highest annual inflation rate at 3.2%, followed by services at 3.1%. Non-energy industrial goods stayed muted at 0.8%, while energy prices fell -1.9% from a year earlier. The data suggest inflation continues to stabilize near the ECB’s 2% target.

BoJ’s Himino: Risk of larger-than-expected tariff impact warrants focus

BoJ Deputy Governor Ryozo Himino warned in a speech today that U.S. trade policies are likely to weigh on Japan’s economy, with overseas slowdowns and weaker corporate profits feeding through domestically. While accommodative financial conditions should cushion the hit, Himino said the baseline scenario is for Japan’s growth to “moderate,” with downside risks from tariffs deserving greater attention.

Looking further ahead, Himino said Japan’s growth should eventually recover as overseas economies return to a more stable expansion path. But in the near term, the tariff shock remains the key uncertainty, with the risk of a “larger-than-expected impact” now seen as more pressing than the chance of a mild outcome.

On inflation, Himino noted that headline prices remain above the BoJ’s 2% target, by a "considerable margin", due in part to surging rice prices and spillovers to other goods. However, he stressed headline inflation is expected to "decline in due course" as food-related effects fade. Underlying inflation, meanwhile, remains below target but is steadily rising, despite some potential "temporary halts", supported by a wage–price feedback loop.

Summing up, Himino said the BoJ’s baseline scenario assumes headline inflation will cool, while core prices continue to edge toward 2%. If that path holds, it would be appropriate for the central bank to keep raising rates gradually, fine-tuning monetary accommodation in line with improving economic activity and stable price gains.

EUR/GBP Mid-Day Outlook

Daily Pivots: (S1) 0.8632; (P) 0.8652; (R1) 0.8665; More...

EUR/GBP's strong rally today solidifies the case that corrective pattern from 0.8752 has completed at 0.8595. Intraday bias is back on the upside for retesting 0.8752. Firm break there will resume whole rally from 0.8221. Next target is 0.8867 fibonacci level. For now, further rise is expected as long as 0.8636 support holds, in case of retreat.

In the bigger picture, the structure from 0.8221 medium term bottom are not impulsive enough to suggest that it's reversing the down trend from 0.9267 (2022 high). But even if it's a correction, further rise could still be seen to 61.8% retracement of 0.9267 to 0.8221 at 0.8867. Nevertheless, sustained trading below 55 W EMA (now at 0.8513) will argue that the pattern has completed and bring retest of 0.8221 low.

ECB Executive Board member Isabel Schnabel pushed back against further monetary easing, telling Reuters that policy maybe already “mildly accommodative” and that she sees no case for another rate cut at present. She noted that the economy has held up better than expected, underpinned by robust domestic demand and bolstered by a "significant fiscal impulse" from Germany’s investment plans in infrastructure and defense.

Schnabel also argued that global tariffs imposed by the Trump administration are likely "on net inflationary", even without EU retaliation. “If you have an increase in input prices globally due to tariffs, and these propagate through global production networks, this will increase inflationary pressures everywhere,” she said.

Schnabel also dismissed concerns that a stronger Euro might weigh heavily on price dynamics. She said currency appreciation tied to improving Eurozone growth prospects would have a more limited pass-through, adding, “I am less concerned about exchange rate developments.” She stressed that she sees little chance of inflation expectations de-anchoring to the downside after years of price overshoots.

Looking forward, Schnabel warned that a more fragmented world with tighter supply chains, higher fiscal spending, and aging populations is structurally inflationary. In such an environment, she argued, "central banks around the world start to hike interest rates again may come earlier than many people currently think."