A mixed start across major currencies

Market overview

Currency markets opened the week on a firmer footing for the dollar, while changing interest-rate expectations and bond yield spreads continued to drive moves across the major pairs. Reduced concern over further Japanese intervention has removed one source of pressure on the greenback, while softer oil prices have eased inflation fears and pulled global yields lower. Sterling has been the main underperformer as UK yields fall faster than those of its peers, while the euro remains supported by growing expectations of an ECB rate increase.

USD: Jobs data holds the key

The dollar has regained some stability following last week’s sharp decline. Japanese intervention appears to have paused, while speculative positioning is likely to be more balanced after the recent sell-off.

Before July’s Federal Reserve meeting, aggregate net-long dollar positioning against reported G9 currencies stood at almost 26% of open interest, its most stretched level since May 2019. With much of that positioning now reduced, further dollar weakness may require clear evidence that the US economy is losing momentum.

Monday’s ISM manufacturing report was stronger than expected, including a notable improvement in employment. Attention now turns to JOLTS job openings, ADP employment and Friday’s non-farm payrolls. Unless these releases point to a decisive slowdown, markets may continue to assign a greater than 50% probability to a September Fed rate increase.

We retain a modestly positive near-term bias towards the dollar.

GBP: Narrowing yield advantage weighs on sterling

Sterling has started the week on the back foot, falling against most G10 currencies as UK bond yield spreads move against it.

GBP/EUR has slipped towards 1.1660 after trading close to 1.1700 on Friday, while GBP/USD has retreated to around 1.3420 from Monday’s high near 1.3500.

The UK-German two-year yield spread has narrowed to its lowest level of 2026, reducing the relative return available to sterling investors. The UK-US spread has also fallen sharply, from around 0.20% last week to close to 0.05%.

Expectations of an ECB rate rise have contributed to the move, with markets pricing close to a 90% chance of a 25 basis point increase in September. At the same time, falling global yields have had an outsized effect on gilts, which tend to move more sharply than comparable government bonds.

Until yield spreads stabilise, sterling rallies may struggle to build momentum.

EUR: ECB expectations provide support

The euro remains supported by rising expectations that the ECB could increase rates in September, although EUR/USD may need further assistance from US interest-rate repricing to extend its recent gains.

Our short-term fair value model suggests EUR/USD is currently around 0.5% to 1.0% overvalued. This is not a strong directional signal, but it indicates that a sustained move higher would probably require weaker US employment data and a reduction in Fed rate expectations.

Our central view is for EUR/USD to move back below 1.1500 as the dollar stabilises. A decline towards 1.1400 appears less likely unless US data materially exceeds expectations.

Looking ahead

• US JOLTS job openings will provide the first major test for the dollar.

• ADP employment data will offer an early indication of labour-market momentum.

• Friday’s non-farm payrolls remain the week’s main risk event.

• Fed and ECB rate expectations will continue to influence EUR/USD.

• Sterling remains vulnerable while UK yield spreads continue to narrow.

• Oil prices and US-Iran negotiations could drive further moves in inflation expectations and global bond yields.