Dollar stalls despite strong payrolls as CPI takes centre stage

Market overview

FX markets begin the week with a familiar tension between resilient US data, uncertain central-bank policy and growing political risk. Friday’s stronger-than-expected US payrolls report briefly lifted the dollar, but the move faded quickly, suggesting investors remain reluctant to chase the currency higher without clearer confirmation from inflation data. The yen remains volatile as Bank of Japan speculation adds another layer to G10 price action, while sterling looks technically vulnerable and the euro continues to balance Fed uncertainty against weaker regional fundamentals. With markets still divided over September policy decisions, this week’s US CPI release is likely to provide the clearest catalyst for a more decisive move across major currency pairs.

USD: Strong jobs fail to deliver a lasting dollar rally

US payrolls increased by 162,000 in August, comfortably above the 55,000 consensus, while June and July were revised higher by a combined 55,000. Unemployment held at 4.1%, participation edged up to 61.6%, underemployment fell to 7.7%, and wage growth remained firm at 0.3% month on month and 3.1% year on year.

Despite the strength of the report, the dollar reaction was restrained. DXY rose initially but gave back much of the move, a notable contrast with the more sustained rally following May’s upside payrolls surprise. The response suggests the market is no longer prepared to treat labour data alone as sufficient justification for a stronger dollar.

Attention has instead shifted firmly towards inflation. Markets currently see the September Fed decision as finely balanced, with inflation data likely to carry more weight than a single strong employment report. Comments from Fed officials have also reinforced the view that underlying price pressures, rather than headline labour strength, will determine the next move.

DXY finished the week close to 99, with support around 98.80 and resistance near 99.70. A firm CPI print could push rate expectations higher and open the door to a break above resistance. A softer reading would strengthen the case for a hold and leave the dollar vulnerable to renewed selling.

Political risk is also becoming harder to ignore. President Trump has publicly called for lower interest rates and has stepped up pressure on the Fed. That creates a potentially important two-sided risk. A hike could initially support the dollar but intensify political pressure on the central bank, while a hold despite resilient data could raise fresh questions over the Fed’s reaction function and credibility.

GBP: Sterling remains vulnerable near key support

Sterling enters the week on the defensive after GBP/USD failed to sustain last week’s recovery attempt. The pair fell to 1.3485 on Thursday, recovered towards 1.3535 ahead of Friday’s US payrolls release, then quickly returned towards its recent lows following the stronger data.

GBP/USD is now trading close to the 1.3506 area, a level that marked the starting point of August’s advance. A sustained move below this zone would weaken the short-term technical picture and bring the 100-day moving average into focus.

That average remains broadly flat, reflecting the rangebound nature of GBP/USD over recent months. As a result, a move lower would still look more like a return towards the centre of the broader range than the beginning of a major trend reversal.

Domestic rate expectations have also softened. The latest Decision Maker Panel survey showed an improving inflation outlook, with one-year expectations returning towards pre-conflict levels and longer-term expectations remaining well anchored. The release further reduced expectations of a September Bank of England hike.

Further out, however, markets continue to price slightly more than one 25bp increase by December. That may reflect the view that the Bank could still deliver an insurance hike if higher energy costs begin feeding into broader inflation. Next week’s UK CPI data will therefore be important in testing how firmly that view is held.

EUR: Euro resilient, but underlying risks remain

EUR/USD quickly recovered the losses triggered by Friday’s US employment data, reinforcing the view that markets remain unconvinced the payrolls report alone is enough to settle the September Fed decision.

For now, the pair is likely to remain sensitive to US inflation expectations. A stronger CPI reading would strengthen the case for a Fed hike and create renewed downside pressure on EUR/USD. A softer print could weaken the dollar and allow the euro to extend its recent resilience.

The euro’s domestic backdrop remains less supportive. Higher oil prices continue to pose a challenge for the eurozone given its dependence on imported energy, while political developments in Germany and France are adding to concerns over fiscal policy, bond-market stability and the future direction of European economic policy.

These risks have yet to translate into sustained euro weakness, but they remain important if borrowing costs continue to rise or political uncertainty deepens.

Ahead of US CPI, EUR/USD may struggle to establish a clear directional trend. The 1.1570 to 1.1630 range remains an important short-term area, with a clean break likely requiring a fresh macro catalyst.

Looking ahead

• Tuesday: New York Fed consumer survey, with inflation expectations likely to attract attention.

• Friday: US CPI is the main event and could prove decisive for September Fed pricing.

• Watch the three-month annualised CPI rate, alongside trimmed mean, sticky-price, median and supercore measures.

• University of Michigan survey: longer-term inflation expectations remain an important check on underlying price pressures.

• GBP/USD: 1.3506 remains the key near-term pivot, with the 100-day moving average below.

• EUR/USD: 1.1570 to 1.1630 remains the immediate range to watch.