Week Ahead: Yen, ECB Rate Hike and US CPI in Focus

📊 The yen, the European Central Bank’s expected rate hike and August U.S. inflation data are set to dominate financial markets this week, while investors will also monitor Germany’s state election, China’s inflation figures and economic data from the UK, Japan, Canada, Australia and Mexico.

The G20 and Shanghai Cooperation Organisation summits also highlighted growing geopolitical and trade tensions. The G20 failed to agree on a joint statement, while the Shanghai Cooperation Organisation expressed solidarity with Iran.

Meanwhile, energy markets remained strong. October WTI crude rose 9.2% last week and settled above $90 a barrel, while November Brent gained 8.5% and closed above $95.

Despite the sharp increase in oil prices, benchmark 10-year government bond yields were relatively stable, with major G7 yields generally moving within around 1.5–2 basis points.

Key Market Drivers This Week

Three developments stand out for currency markets:

• 🇯🇵 Yen volatility and the JPY155 level
• 🇪🇺 The ECB’s expected 25-basis-point rate hike
• 🇺🇸 August U.S. CPI and its implications for the September FOMC meeting

Germany’s Saxony-Anhalt election could also generate political uncertainty in Europe, particularly if the Alternative for Germany (AfD) performs strongly.

For broader developments, traders can follow the latest [Market Analysis] and [Macroeconomic News].

United States

Dollar and Treasury Yield Drivers

The relationship between the U.S. dollar and Treasury yields remains important. The rolling 30-day correlation between changes in the Dollar Index and the U.S. two-year yield is around 0.52, after reaching nearly 0.80 around the June FOMC meeting.

The stronger-than-expected increase in August nonfarm payrolls initially pushed the U.S. two-year yield higher and supported the dollar. However, those gains faded as the session progressed.

Fed funds futures are currently pricing in slightly more than 15 basis points of tightening for this month.

August CPI in Focus

The most important U.S. economic release ahead of the September 15–16 FOMC meeting is August CPI.

The year-over-year headline CPI rate has declined during the past two months and is expected to ease further. A 0.2% monthly increase in August would bring the annual rate down to around 3.3% from 3.4%.

The headline rate previously peaked at 4.2% in May.

Core CPI has also declined, falling from 2.9% to 2.5% over the past two months. A monthly increase of 0.2%, roughly in line with its average this year, could push the annual core rate down to around 2.4%.

That would be the lowest level in more than five years.

📌 Market focus: A firmer-than-expected CPI reading could strengthen expectations for another Fed rate increase, while softer inflation could reduce those expectations.

Dollar Index Outlook

The Dollar Index initially strengthened last week and reached slightly above 99.85, its highest level in about two and a half weeks.

However, the sharp yen rally pushed the dollar lower, with DXY falling to around 98.85 on Thursday.

Even after stronger-than-expected U.S. job growth, the index failed to break Thursday’s high near 99.60.

With a U.S.-Canada holiday on Monday, the ECB meeting on Thursday and U.S. CPI on Friday, broad consolidation could remain the most likely near-term scenario for the dollar.

Euro Area

ECB Rate Hike Expected

The European Central Bank is expected to raise interest rates by 25 basis points at its September 10 meeting, taking the deposit rate to 2.50%.

Markets are also assigning a strong probability to another rate increase before the end of the year.

Inflation risks remain important, particularly as ECB staff could revise their longer-term inflation forecasts higher.

ECB President Christine Lagarde could therefore signal that the central bank’s tightening cycle may not yet be finished.

Upcoming monetary-policy developments can be tracked through the latest [Central Banks] coverage.

Germany’s Saxony-Anhalt Election

Germany’s state election in Saxony-Anhalt is another major political event for Europe.

The populist AfD could potentially win its first state-level election if it secures enough support for an outright majority.

The result could have broader implications for German politics because the political firewall around the AfD has previously contributed to difficult coalition arrangements in other eastern German states.

A strong AfD performance could therefore increase political uncertainty surrounding Chancellor Friedrich Merz and Germany’s political direction.

EUR/USD Outlook

The euro spent most of last week inside the range established on August 28, roughly $1.1580–$1.1660, apart from a midweek decline.

The week’s low was close to $1.1565.

The $1.1575 area remains technically important because it represents the 38.2% retracement of the euro’s rally from the late-July low near $1.1355 to the August 20 high around $1.1710.

Despite stronger-than-expected U.S. employment data, the euro remained relatively resilient.

However, momentum indicators are still declining, suggesting that the current consolidation or corrective phase may not yet be complete.

China

Yuan Remains Stable

China’s management of the yuan has produced unusually low exchange-rate volatility.

Historical volatility over the past month has been below 1.4%, while three-month volatility has been around 1.7%.

Despite the stability, the yuan has appreciated by slightly more than 4% this year, making it one of the strongest emerging-market currencies.

Only the Norwegian krone and Australian dollar among the G10 currencies have performed better.

China CPI and PPI

China’s August CPI and PPI figures are due on September 9.

Consumer-price growth remains weak, with headline inflation around 0.5% year over year and core inflation near 1.0%.

Weak domestic demand remains an important factor, while lower food prices have also contributed to subdued headline inflation.

Producer prices have been gradually moving out of deflation, with higher commodity and energy prices providing additional support.

USD/CNH Outlook

The dollar fell to almost CNH6.7050 before the weekend, its lowest level since January 2023.

The previous major low was around CNH6.6975.

The median market forecast sees USD/CNH ending the year near 6.70, although a move toward 6.65 or slightly below remains possible if the yuan continues to strengthen.

Japan

BOJ Rate Hike Expectations

Markets have increasingly priced in a Bank of Japan rate increase later this month.

The September 18 BOJ meeting is therefore highly significant. With a rate hike already heavily discounted, the absence of a hike could generate a stronger market reaction than the hike itself.

Markets are also pricing the possibility of further tightening later in the year.

Japanese Economic Data

July labor earnings and trade data will be closely monitored.

Real cash earnings rose by a revised 2.2% year over year in June, up from the previous estimate of 1.6%.

However, stronger real wages have yet to translate into stronger household consumption.

Japan will also release revised Q2 GDP data. In the initial estimate, private consumption was flat.

USD/JPY Technical Outlook

The JPY155 level remains critical.

Previous Japanese intervention in April and May, as well as coordinated intervention in late July, failed to push the dollar decisively below this level.

The latest yen rally also stopped around JPY155.

For now, the upside in USD/JPY could remain limited around JPY157.00–JPY157.25.

⚠️ Traders will continue to watch the 155 area closely for signs of renewed intervention risk or additional position adjustments.

United Kingdom

Sterling remains highly sensitive to the broader direction of the U.S. dollar.

The correlation between changes in sterling and the Dollar Index has remained strongly negative, while sterling also maintains an inverse relationship with U.S. two-year Treasury yields.

UK GDP in Focus

The UK will publish July GDP data and additional economic details on September 11.

After expanding by 0.4% quarter over quarter in Q2, the economy is expected to slow significantly, with the median forecast pointing to only around 0.1% growth in Q3.

Markets currently see only a limited chance of a Bank of England rate hike at its September 17 meeting, although a hike is fully priced by year-end and another is expected by the end of Q1 2027.

GBP/USD Outlook

Sterling declined from around $1.3675 on August 21 to approximately $1.3475 last week, where it appeared to establish a potential base.

A sustained move above $1.3550 would improve the technical tone.

Further resistance is located around $1.3575–$1.3600.

However, momentum indicators remain weak, meaning downside risks have not disappeared.

Canada

The Bank of Canada’s hawkish decision to hold rates helped trigger a strong recovery in the Canadian dollar last week.

The BoC maintained its overnight target rate at 2.25%, while markets continue to expect the next move to be a rate increase.

There are no major Canadian government economic reports scheduled for the week ahead, leaving currency movements particularly sensitive to the U.S. dollar, interest-rate differentials and broader market sentiment.

USD/CAD Outlook

USD/CAD fell to around CAD1.3765 last week before recovering above CAD1.3870.

The CAD1.39 area represents initial resistance, followed by last week’s high near CAD1.3940.

A sustained break above that level could expose CAD1.40.

Australia

The Australian dollar continues to benefit from expectations of tighter monetary policy.

Markets have raised the probability of a Reserve Bank of Australia rate increase to around 66%, compared with less than 50% the previous week and only around 12% on August 25.

A rate increase to 4.60% is now fully priced by year-end.

AUD/USD Outlook

The Australian dollar fell to approximately $0.7120 last week but remained above its 20-day moving average.

It subsequently climbed to around $0.7215, reaching its highest level since mid-May.

Initial resistance is near $0.7250, while the more important target is the four-year high around $0.7280.

Mexico

Mexico’s most important economic release this week is August CPI.

Headline inflation could increase for the first time since March after reaching 3.12% year over year in July, close to the midpoint of Mexico’s 2%–4% target range.

Core inflation has been more persistent but fell below 4% in July for the first time since April.

USD/MXN Outlook

The expected U.S. dollar rebound stalled around MXN17.05–MXN17.07.

USD/MXN then recorded a bearish outside day on September 3, followed by additional selling that pushed the pair to around MXN16.8625.

That was the lowest level since the 2024 presidential-election period.

The dollar has now recorded lower weekly highs for eight consecutive weeks, while it has risen on a net basis only once during the past seven weeks.

The next potential downside target is around MXN16.80.

Key Forex Levels to Watch

Currency Pair	Key Level	Main Driver
USD/JPY	155 / 157.00–157.25	BOJ and intervention risk
EUR/USD	1.1575 / 1.1660	ECB and U.S. CPI
USD/CNH	6.70 / 6.65	China data and yuan strength
GBP/USD	1.3550–1.3600	UK GDP and USD
USD/CAD	1.39 / 1.40	BoC and rate differentials
AUD/USD	0.7250 / 0.7280	RBA expectations
USD/MXN	16.80	Mexico CPI and USD direction

Conclusion

📅 The week ahead is dominated by central-bank expectations, inflation data and currency-market positioning.

The most important events are:

• 🇺🇸 U.S. August CPI, which could influence expectations for the September FOMC meeting.
• 🇪🇺 ECB’s expected 25bp rate hike, with markets watching for guidance on additional tightening.
• 🇯🇵 JPY155, a key level amid renewed yen strength and intervention concerns.
• 🇩🇪 Saxony-Anhalt election, which could have wider implications for German politics if the AfD performs strongly.
• 🇨🇳 China CPI and PPI, which will provide fresh information on inflation and domestic demand.
• 🇬🇧 UK GDP, which could influence sterling and Bank of England expectations.

Overall, the combination of U.S. inflation, ECB policy, yen positioning and political developments in Germany could produce significant volatility across the major currency pairs.

For upcoming economic releases, traders can also monitor [Economic Calendar Events], while broader economic developments are covered in [Macroeconomic News].