USD

The US dollar found little momentum, so far this week, as traders became increasingly convinced that the Federal Reserve will opt for an interest rate cut next month. Hints from New York Fed President John Williams that policy easing could be on the table reinforced those expectations.

The greenback has also been weighed down by political turbulence, with President Donald Trump intensifying efforts to steer central bank decisions. His push to remove Fed Governor Lisa Cook and appoint a loyal supporter has unsettled investors. Even against the euro, the dollar underperformed, despite political uncertainty in France where the Prime Minister faces a confidence vote that may topple his government.

The dollar index was steady at 98.145 following two days of losses. Traders are focused on upcoming economic data ahead of the Fed’s 16–17 September policy meeting, particularly Friday’s release of the PCE price index, the Fed’s preferred inflation measure, and next week’s employment report. Market pricing suggests around an 89 percent chance of a quarter-point cut in September, with expectations of a total of 55 basis points of easing by the end of the year. Two-year Treasury yields, highly sensitive to policy outlook, have dropped to their lowest since the beginning of May, adding further pressure on the currency.

GBP

Sterling had advanced steadily until mid-August, driven by stronger-than-expected UK data and sticky inflation which led markets to anticipate further Bank of England tightening. However, signs of fatigue have since appeared.

Mounting risks are building against the pound. Investors increasingly expect the BoE to soften its stance during the autumn, while fiscal concerns are drawing attention back to the government. The rise in long-dated UK bond yields has been dramatic, with the 30-year yield touching 5.63 percent, the highest in nearly thirty years. This spike has amplified calls for Prime Minister Keir Starmer’s administration to demonstrate fiscal discipline. Yet, previous tax and spending adjustments have shown that tightening too aggressively can dampen growth, which may in turn limit sterling’s resilience.

EUR

The euro briefly gained momentum, pushing beyond 1.1660, but political turbulence across Europe capped the move. In France, a looming confidence vote threatens the survival of the minority government, while in the Netherlands, Prime Minister Dick Schoof only narrowly survived his own no-confidence motion after a coalition rupture over foreign policy. The October snap election campaign is now under way, underscoring deep divisions in Dutch politics.

The single currency later pared losses as markets absorbed these developments, finishing flat by the end of the session. Adding to the complexity, the European Union agreed to scrap all tariffs on US industrial goods, bowing to pressure from President Trump and avoiding steep duties on car exports. While the concession reduces immediate trade risks, it has stirred debate about Europe’s ability to negotiate balanced trade arrangements.

Bond markets reflect these tensions, with eurozone spreads widening. Though spreads are not purely a measure of credit risk, their current trajectory signals stress linked to political uncertainty and trade concessions. This could deepen short-term weakness in the euro, although investors still view developments in the US as the primary driver of the currency pair.

Looking ahead

Attention remains firmly on upcoming US data releases that will shape expectations for September’s Fed decision. For sterling, bond market developments and fiscal strategy from the government will remain key. In Europe, political instability in France and the Netherlands will continue to weigh on sentiment, but the euro’s direction is likely to be influenced more by US monetary policy than domestic factors.