USD

The dollar’s path continues to be steered by expectations for Federal Reserve policy and the debate around its independence. These themes, combined with broader US data, have been the key drivers of volatility. Early this week, Powell’s comments at Jackson Hole on the likelihood of a higher long-term neutral rate pushed the greenback up by around 0.7%. Yet, half of those gains were quickly surrendered when former President Trump threatened to remove Fed Governor Lisa Cook.

August’s trading pattern shows a transition: worries over tariffs have given way to doubts about central bank autonomy. Tariffs have already left a clear economic mark, with weaker jobs data standing out as evidence, but the larger concern now is political interference at the Fed. Markets are watching whether such interference could extend beyond the currency and weigh on US assets more broadly, especially longer-dated Treasuries.

GBP

Sterling has struggled this year, with GBP/EUR falling over 4% year-to-date, leaving the currency near the lower end of its historical performance for late summer. This weakness is striking given the UK’s yield advantage, as structural shifts in capital flows towards the eurozone, helped by Germany’s fiscal expansion, are proving more powerful than relative interest rates.

Despite stable rate and growth gaps between the UK and euro area since late 2024, the euro has attracted flows that might otherwise have supported the pound. Recently, tensions in France have provided a little support to sterling, lifting GBP/EUR back towards €1.16. Technical signals hint at the possibility of a move above this summer’s range, though such breakouts have often reversed without solid fundamental backing. Seasonal patterns also suggest caution, as the pound typically lags in the third quarter.

Long-dated gilts, now yielding more than any other major government bond, should in theory draw capital inflows. However, the pound’s lacklustre performance indicates persistent unease about the UK’s fiscal position and growth outlook. Elevated borrowing costs relative to peers, a trend that began during the Truss mini-budget episode and has since hardened, underline investor caution. With policy choices failing to reassure, the market continues to demand a risk premium to hold UK assets.

EUR

The euro has traded unevenly, buffeted by both US and European news. While Fed independence concerns dominated headlines and briefly lifted EUR/USD by around 0.33%, the euro’s resilience is being tested by political risks closer to home. France faces a crucial confidence vote on 8 September 2025, and the possibility of government collapse looms large. One-month EUR/USD volatility has already risen relative to longer maturities, reflecting the uncertainty.

At a time when EU unity is under strain, most recently from a poorly handled trade deal, internal divisions leave the euro more exposed. Germany’s record infrastructure and defence spending has supported the currency by improving long-term growth prospects, but this tailwind is now colliding with renewed political fragility inside the bloc.

Looking ahead

The months ahead carry significant event risk for all three currencies. For the dollar, the focus will remain on the Fed’s credibility and whether politics begins to cloud policy decisions. The pound faces the challenge of balancing high yields with fragile growth, while fiscal doubts continue to weigh heavily. The euro, meanwhile, is bracing for France’s pivotal political test, which could determine whether structural support from Germany’s spending is strong enough to offset instability elsewhere.