Rates reclaim centre stage as FX markets reset

Market overview

FX markets are ending the week with rates back in the driving seat. Early optimism over potential progress on reopening shipping routes through the Strait of Hormuz pushed oil sharply lower, improved risk appetite and encouraged flows into higher-beta currencies. That move has since lost momentum, with US yields climbing and expectations of tighter Federal Reserve policy returning to the forefront. The result is a more two-way market, with the dollar regaining ground, sterling struggling for direction and the euro losing some of its recent momentum. Today’s US payrolls report now represents the clearest near-term catalyst for a fresh move across major currency pairs.

USD: Payrolls put the rates story to the test

The dollar initially weakened as falling oil prices reduced geopolitical risk and encouraged investors towards higher-beta currencies. Attention has since shifted decisively back to US rates.

Despite Brent falling by as much as 12% at one stage this week, expectations for Federal Reserve policy have remained relatively firm. Hawkish comments from Fed officials, combined with reports that Chair Warsh could support higher rates if inflation stays elevated, have pushed short-dated Treasury yields higher and strengthened the dollar’s link with US rate expectations.

The economic backdrop is also offering support. US services activity continues to point to resilient growth, underpinned by AI-related investment and firm consumer spending.

Today’s payrolls release is therefore pivotal. A weak print could reinforce expectations that the Fed remains on hold, while a stronger report would strengthen the case that June’s softness was temporary and keep further tightening firmly in play.

GBP: Sterling searches for a stronger catalyst

Sterling has struggled to establish a clear direction this week. It has gained against some commodity-linked currencies as oil prices eased, but underperformed higher-beta peers as global risk sentiment improved.

GBP/EUR has settled in the upper 1.16s after pulling back from July’s one-year highs above 1.18, with narrower UK-eurozone yield spreads reducing support for the pound. GBP/USD, meanwhile, remains confined to the broad 1.32 to 1.35 range that has dominated much of 2026.

Subdued implied volatility reinforces the sense of a market lacking conviction. With UK-specific developments generating limited momentum, sterling remains increasingly sensitive to shifts in the dollar, global risk appetite and energy markets.

Today’s US labour market data could provide the next break. Softer payrolls would improve the chances of GBP/USD testing the upper end of its recent range, while a stronger release would favour renewed dollar demand.

EUR: Improving fundamentals meet external pressure

The euro has lost ground into the end of the week, with EUR/USD slipping back towards 1.15 as firmer oil prices, higher US yields and more hawkish Fed expectations support the dollar.

Domestic signals have nevertheless improved. German factory orders rose 3.1% in June, adding to a stronger run of GDP, PMI and business confidence data. Together, these suggest that Europe’s largest economy is beginning to regain traction after an extended period of weakness.

The recovery remains exposed to external risks. Higher energy costs continue to challenge energy-intensive industries, while low Rhine water levels add another potential constraint for manufacturers and supply chains.

EUR/USD is therefore caught between improving eurozone fundamentals and a less supportive global backdrop. The medium-term recovery story remains credible, but near-term momentum has weakened as energy costs and US rate expectations return to focus.

Looking ahead

• US payrolls: The immediate test for the dollar and current Fed rate expectations.

• US CPI next week: A key signal for whether markets should price a more persistent tightening bias.

• Energy prices: Further volatility could have important consequences for risk sentiment, the euro and commodity-linked currencies.

• US yields: Continued strength at the front end of the Treasury curve would favour renewed dollar support.

• GBP/USD and EUR/USD: Both remain highly sensitive to the balance between US growth resilience and the outlook for Federal Reserve policy.