Jackson Hole takes centre stage as dollar confidence wavers
Market overview
FX markets begin the week with the dollar still under pressure as investors focus increasingly on US policy credibility rather than traditional economic fundamentals. EUR/USD is trading near 1.168 after gaining almost 1% last week, while GBP/USD remains around 1.364 and close to the top of its 2026 range. GBP/EUR is little changed near 1.168, leaving sterling considerably stronger against the dollar than against the single currency.
The dollar’s failure to benefit from elevated Treasury yields remains the most striking market development. The US 10-year yield is close to 4.71% and the 30-year around 5.25%, having reached a 19-year high of 5.337% last week. The initial bond rally following the Treasury’s decision to increase long-dated buybacks has largely reversed, suggesting the underlying concerns surrounding inflation, government borrowing and debt supply remain unresolved. Brent crude has eased but remains elevated around $93 a barrel, while a weaker start for Asian equities underlines the cautious wider risk environment.
Attention now turns to Wednesday’s US inflation figures and Friday’s address from Federal Reserve Chair Kevin Warsh at Jackson Hole. Together, the two events will test whether the dollar’s recent decline is mainly a temporary response to Treasury policy or the beginning of a more lasting reassessment of US assets.
USD: Higher yields no longer guarantee a stronger dollar
The dollar enters the week close to recent multi-month lows despite long-term US borrowing costs remaining among the highest in the developed world. Ordinarily, that yield advantage would attract international capital and support the currency. Instead, markets increasingly appear to view part of the increase in yields as compensation for fiscal and policy uncertainty rather than evidence of stronger growth or tighter monetary policy.
Last week’s expansion of the Treasury’s bond-buyback programme accelerated that shift. The maximum size of liquidity-support purchases for 10-to-30-year securities will at least double from $2 billion to $4 billion per operation from 9 September. Although the programme is intended to improve market functioning, investors interpreted the announcement as evidence that policymakers had become uncomfortable with the level of long-term yields. The result was a brief fall in borrowing costs, a sharper decline in the dollar and renewed demand for alternative stores of value such as gold and Bitcoin.
The economic data do not provide an obvious justification for sustained dollar weakness. Friday’s US composite PMI rose to 56.0, its highest level since April 2022, while the services index climbed to 56.8. Manufacturing slowed to a five-month low of 53.2 but remained comfortably in expansion territory. The dollar’s inability to recover following those figures reinforces the view that institutional and fiscal concerns are temporarily outweighing economic performance.
Wednesday’s personal consumption expenditure figures will provide the next test. Headline PCE inflation is forecast to ease to 3.6% year-on-year from 3.7%, while the core rate is expected to remain at 3.3%. Core prices are forecast to rise 0.2% month-on-month. The second estimate of second-quarter GDP is expected to confirm annualised growth of 1.5%, with durable-goods orders and personal-spending figures released alongside it.
A stronger inflation reading would increase the pressure on the Federal Reserve to retain a hawkish stance, but it may not automatically rescue the dollar. Markets will also want reassurance from Warsh that monetary policy remains committed to the 2% inflation target and insulated from political or Treasury influence. If Friday’s speech concentrates largely on Federal Reserve reform and financial innovation while avoiding clear guidance on inflation and rates, uncertainty surrounding the policy outlook could persist.
GBP: Sterling tests its yearly ceiling
Sterling begins the week close to a six-month high against the dollar. GBP/USD ended Friday around 1.3646 after briefly reaching 1.3676, leaving the pair directly beneath the 2026 range ceiling near 1.3661. The exchange rate is now above its major moving averages, with both the 21-day and 50-day measures rising, supporting the case for a continuation of the broader advance.
A daily close above 1.3661 would open the way towards the 1.3680-1.3690 area and potentially the psychologically important 1.37 level. However, momentum indicators have moved into overbought territory, increasing the likelihood of a period of consolidation before another sustained advance. Former resistance around 1.3506 is the more important support level and would need to break before the current uptrend was seriously questioned.
The domestic economic backdrop remains mixed. July retail sales fell 0.5% month-on-month, with non-food sales particularly weak, but the August services PMI rose to a six-month high of 52.8. This suggests household spending remains uneven while the wider service-led economy continues to expand. Recent labour-market and inflation releases have also strengthened the case for the Bank of England to leave rates unchanged for the remainder of the year, although markets still retain some probability of one further 25-basis-point increase.
Sterling’s relatively high yield continues to attract carry demand, but its performance against the euro is less convincing. GBP/EUR has spent seven weeks retreating from its early-July high and remains within a sequence of lower peaks. The next downside levels are around 1.1633 and 1.1600, while a daily close above 1.1750 would be required to signal that the correction has ended.
The principal medium-term vulnerability remains the UK’s fiscal position. Public-sector borrowing unexpectedly reached £1.8 billion in July, compared with expectations for a broadly balanced month, while public debt is close to £3 trillion and equivalent to approximately 94% of GDP. With the domestic calendar relatively light this week, global bond-market movements and concerns about government financing costs are likely to be more important for sterling than UK data.
EUR: Technical recovery gains fundamental support
EUR/USD remains close to three-month highs after dismantling the descending trendline that repeatedly capped gains earlier in the year. The pair is also trading above its 200-day moving average near 1.1630, creating a more constructive technical backdrop. Immediate resistance is Friday’s high around 1.1712, followed by the 1.18 area, while a daily close back below the 200-day average would cast doubt on the breakout.
The recent advance has pushed momentum into overbought territory, suggesting some consolidation may be needed before the euro can extend higher. Nevertheless, the underlying structure remains supportive: August has produced a sequence of higher lows, the former downtrend has been broken and the 200-day average is now acting as potential support rather than resistance.
There are also signs that the eurozone economy is developing a stronger domestic story. August’s flash composite PMI rose to 52.1 from 52.0, its strongest reading of 2026. Manufacturing improved to 52.8, its best performance since May 2022, while services held at 51.7. The improvement was led by stronger German industrial activity, although France remained a weak point, with its composite indicator falling further into contraction territory.
Even so, much of the euro’s appreciation continues to reflect dollar weakness. Elevated energy prices remain a risk to European growth and could make further ECB tightening more economically costly. Convera argues that a sustained move towards 1.18-1.20 would probably require a euro-specific catalyst, such as a durable decline in energy costs or further evidence that eurozone growth is outperforming expectations.
This week’s European calendar may provide that catalyst. Germany’s IFO business-climate survey is expected to improve on Tuesday, followed by the account of the ECB’s July meeting on Thursday. Flash inflation figures from France and Spain arrive on Friday. With a September ECB increase already fully reflected in market pricing, the inflation releases will be more important for expectations beyond September than for the immediate meeting.
Looking ahead
German IFO survey — Tuesday: The business-climate index is forecast to rise to 87.2 from 86.6. A further improvement would reinforce Friday’s stronger German manufacturing survey and provide the euro with additional domestic support.
UK business surveys — Wednesday and Friday: The CBI retail-sales survey is released on Wednesday following a reading of -26 in July. The Lloyds Business Barometer follows on Friday after registering 49 previously. Neither is expected to materially alter Bank of England pricing, but the surveys will provide further evidence on the resilience of the UK economy.
US PCE inflation — Wednesday: Headline inflation is forecast to ease to 3.6% from 3.7%, while core inflation is expected to remain at 3.3%. Core prices are forecast to increase 0.2% month-on-month. A stronger result would raise the stakes for Warsh’s Jackson Hole appearance.
US second-quarter GDP — Wednesday: The second estimate is expected to confirm annualised growth of 1.5%. A revision higher would underline the resilience shown in the latest PMI surveys, although recent currency moves suggest growth data alone may not be sufficient to reverse dollar weakness.
ECB meeting account — Thursday: The account of July’s meeting is released at 12:30 BST, alongside eurozone money-supply data. Markets will focus on how widely policymakers supported further tightening and whether concerns about energy prices and growth are beginning to temper the ECB’s hawkish bias.
French and Spanish inflation — Friday: French harmonised inflation is forecast at 2.6% year-on-year, while Spain’s rate is expected to jump to 4.6% from 3.9%. An upside surprise, particularly from Spain, could encourage markets to price additional ECB increases beyond September and place further pressure on GBP/EUR.
Jackson Hole — Friday: The symposium runs from 27-29 August under the theme “Financial Innovation: Implications for Payments and Policy”. Warsh is due to speak at 15:00 BST on Friday. Markets will be looking for a clear commitment to the 2% inflation target, evidence of Federal Reserve independence and greater clarity on how the new Chair intends to communicate policy.