With central banks on hold, oil prices and trade talks drive FX movements
Category: Business
As the week ahead approaches, currency markets are gearing up for a series of economic indicators that could shift the balance for major currencies. Traders are particularly focused on oil prices and the upcoming meeting between U.S. President Donald Trump and Chinese President Xi Jinping, scheduled for September 17, 2026. With no tier-one central bank decisions from the Bank of England, European Central Bank, Federal Reserve, Reserve Bank of Australia, Bank of Canada, or Reserve Bank of New Zealand, global economic drivers will play a more prominent role in shaping currency movements.
The U.S. Dollar emerged as the best-performing major currency last week, buoyed by the Federal Reserve's first rate hike since 2023 and a slump in the Japanese Yen. Meanwhile, the New Zealand Dollar trailed behind, marking itself as the weakest of the six currencies analyzed. Investment bank analysts expect the flash Purchasing Managers' Index (PMI) readings for September, due on September 23, to reveal how rising energy prices are impacting economic activity across major economies.
In recent weeks, oil and liquefied natural gas shipments through the Strait of Hormuz have surged, reaching their highest levels in six months as of September 19, 2026. This increase is particularly relevant as Brent crude oil prices remain above $100 a barrel, which has implications for inflation and interest rates globally. Admiral Brad Cooper, head of U.S. Central Command, noted that momentum is building in the region, but Iran's claims of closing the strait and stalled regional talks on shipping routes add uncertainty.
Avery Shenfeld, Chief Economist at CIBC Capital Markets, commented, "The Fed is counting on lower oil prices ahead from some progress in getting tankers moving through the Straits. Yet, with no negotiations underway to end the Persian Gulf impasse, we see growth risks tilted downward, and inflation risks from energy prices tilted higher." This sentiment reflects the broader concern among economists about rising energy costs affecting economies worldwide.
The scheduled meeting between Presidents Trump and Xi on September 17 is another focal point for the week. With the current U.S.-China trade truce set to expire on November 10, 2026, the stakes are high. Analysts at UniCredit suggest that the timing of this meeting is particularly important, as it could lay the groundwork for an extension of the truce. They anticipate that a grand trade deal is unlikely, but an extended truce with some tangible wins for both sides may be the most realistic outcome, especially concerning tariffs on approximately $30 billion worth of non-strategic goods.
"The timing matters: the current U.S.-China trade truce expires on 10 November, putting an extension at the top of the economic agenda," said a representative from UniCredit. The outcome of this meeting could significantly influence market sentiment and currency valuations in the coming weeks.
In the face of these global developments, the British Pound exhibited surprising resilience, falling only 0.98% against the Dollar last week. This decline came after the Bank of England decided to hold its Bank Rate at 3.75%, diverging from the path taken by the Federal Reserve and other central banks that opted for hikes. The pound-to-dollar rate closed at 1.3395, and the pound-to-euro rate remained relatively flat at 1.1661.
According to Lloyds Bank's Market Insights team, the upcoming PMIs for September will provide additional insight into the UK's economic health. They forecast a slight increase in the Composite PMI, expecting it to edge up to 52.7 from 52.5, indicating resilient business activity even in a challenging environment. Swati Dhingra, a member of the Monetary Policy Committee, noted that the Bank of England's decision to halt gilt sales added pressure on the Pound, but the late-week rally linked to rising global bond yields helped mitigate losses.
The Euro faced its own challenges last week, falling 0.97% against the Dollar as rising U.S. yields and renewed energy pressures weighed heavily on the Eurozone's economic outlook. With the European Central Bank having recently raised rates to 2.5%, the focus now shifts to the upcoming PMIs, which are expected to show a slight easing in growth.
Danske Bank anticipates the composite PMI to decrease to 51.5 from 52.0, citing higher energy costs as a detriment to new orders. The Eurozone also faces fiscal risks, particularly with state elections in Germany and Italy's deficit revision on the horizon. Analysts believe that sustained high energy prices, along with the Fed's tightening measures, will keep the Euro on a declining trend against the Dollar.
The U.S. Dollar's performance last week was bolstered by the Fed's decision to raise rates by 25 basis points to a range of 3.75-4.00%. This move, coupled with a strong gain against the Yen, has positioned the Dollar favorably in the market. Analysts predict a more than 50% chance of another rate hike in October, just before the midterm elections on November 3.
Elias Haddad, Global Head of Markets Strategy at BBH, stated, "Going forward, tightening by other major central banks limits policy divergence with the Fed and suggests USD is unlikely to make new cyclical highs. But the U.S. growth advantage relative to other major economies skews USD risk to the upside." The upcoming week will feature a light calendar for U.S. economic data, with new home sales and durable goods orders being the highlights.
As the currency markets prepare for the upcoming economic indicators and geopolitical events, traders are advised to stay vigilant. The interplay of oil prices, trade negotiations, and central bank policies will undoubtedly shape the direction of major currencies in the days to come.
With all eyes on the Trump-Xi summit and the release of key economic data, the coming week will likely be a defining moment for currency traders.