Dollar continues to nudge higher

A renewed rise in oil prices back towards last week’s highs (of around $110 p/b in the case of Brent crude) maintained the pressure on government bond yields, as the benchmark US 10-year yield reached 5% for the first time in about three years. In FX, the dollar continues to nudge higher ahead of the Fed’s interest rate announcement tomorrow – a 25bps hike is more or less done and dusted as far as the market is concerned – trading at around $1.1540 and $1.3470 against the euro and sterling respectively, its best levels since early- to mid-August. EURGBP is a touch softer again this morning, trading about £0.8565. Labour market data released a short while ago in the UK were in line with expectations, hence they’ve had little impact on the pound.

Rising oil prices, not to mention a continuing increase in European gas prices, resulted in a further hardening of central bank rate hike expectations and maintained the upward pressure on government bond yields. The short-end of markets saw the biggest increase in yields, with German and UK 2-year yields rising by 7-8bps and equivalent US yields about 3-4bps higher on the day. It’s more of the same for bonds this morning as yields continue to head north. Equity markets were under pressure from higher bond yields, and on the back of talk about the need to slow the development of AI, with US and European indices off around half a percent or so.

This morning’s labour market data in the UK were broadly in line with expectations. The unemployment rate came in at 4.9% for the May-July period, unchanged from the three months to April (but a touch higher than in May-July 2025). On the wage growth front, the annual increase in average weekly earnings (excluding bonuses) nudged up to 3.5% over the three months to July (from 3.4% in February-April), while private sector earnings growth nudged down to 2.9% (from 3%).

ECB member Schnabel says last week’s increase in interest rates was a “kind of a logical response to the expected deviation of inflation from our (2%) target over the medium term in the absence of appropriate monetary-policy action, but “whether that is enough” remains to be seen. The market is currently pricing in a near 75% chance of another 25bps hike  in the deposit rate next month.

For the day ahead, it’s quiet enough on the economic data front with the ZEW investor sentiment index for Germany/Euro area and the ADP weekly employment report and Empire manufacturing index in the US the only releases of note.  We will also hear from a number of ECB members over the course of the day.