USD
The US dollar index looks set to register its seventh straight monthly drop of 2025, falling by more than 2% against a basket of major currencies and showing weakness against nearly nine out of ten currencies globally. Month-end market flows are obscuring clear trading signals, while anticipation of the August payrolls report is keeping positioning cautious. Yet the larger story is structural rather than temporary. Tariffs are dragging on household and corporate demand, placing pressure on GDP growth. At the same time, tighter immigration rules are constraining labour supply, pushing wages higher but lowering potential output. Together, these shocks slow growth without easing inflation, creating conditions where real interest rates tend to fall.
Bond markets are reflecting the pressure. Short-dated yields are edging lower as investors expect cuts, while longer-dated yields are climbing due to fiscal worries and lingering inflation risk. This combination rarely helps the dollar, as it signals both weaker economic performance and diminishing policy credibility. Political dynamics are intensifying the strain, with Donald Trump’s ongoing challenges to the Federal Reserve’s independence eroding confidence in the central bank.
Even revised growth figures offered little comfort. Second-quarter GDP was raised to 3.3%, but the strength was exaggerated by a collapse in imports of over 30%, which artificially inflated the number. Stripping away trade distortions, core domestic demand grew only 1.9%, underscoring slower momentum. In short, the dollar faces structural headwinds: weaker demand, limited supply growth, and undermined institutions. The next test comes with the PCE report today, which could offer only short-term relief if inflation proves stickier than expected.
GBP
Sterling has staged a modest comeback, supported by firmer UK data and rising expectations that the Bank of England may strike a more hawkish note. Having dropped nearly 4% in July, GBP/USD recovered by more than 2% in August, stabilising in the $1.34–1.36 range. This rebound reflects easing pessimism, although it is too early to call a lasting shift. For now, GBP/USD remains the clearest vehicle for expressing short-term optimism as the dollar softens, while GBP/EUR may also advance given heightened political risk in the eurozone.
Despite the improved tone, the pound’s longer-term outlook is still clouded by fiscal concerns linked to the autumn budget. However, surveys suggest the UK economy retains momentum. Lloyds reported business confidence at its highest level in nearly ten years, with the majority of firms expecting to expand hiring. Notably, more than 80% of businesses indicated that the payroll tax increase and higher minimum wage would not significantly affect recruitment plans.
Hiring intentions have risen for a fourth consecutive month, and a quarter of firms are offering pay rises of around 4%, above inflation. This suggests companies are passing higher labour costs to consumers rather than cutting back on staff. These findings are consistent with PMI data showing the fastest pace of private sector expansion in a year. The numbers provide political support for Chancellor Reeves as she defends Labour’s first budget, but they also create complications for the BoE, since stronger demand and higher wages could delay rate cuts.
EUR
The euro is under pressure as France faces another political upheaval. Prime Minister François Bayrou is widely expected to lose a confidence vote in the National Assembly on 8 September, which could stall efforts to reduce the national debt while President Macron seeks to rebuild his government. Investor unease is growing, with the pound rising to 1.16 against the euro, testing resistance levels. Analysts say this will not trigger a eurozone crisis of the magnitude seen in the 2010s, but the political uncertainty is unsettling markets, with French equities falling and government bond yields rising faster than in other countries.
For now, EUR/USD has traded between 1.16 and 1.17, with movements still largely dictated by developments in the US rather than internal eurozone issues. Yesterday, the euro outperformed thanks to the release of supportive ECB minutes and stronger economic data. Eurozone confidence readings point to cautious optimism for third-quarter growth, despite headline declines, as conditions appear firmer than earlier in the year.
ECB commentary in July emphasised caution on further rate cuts, though weaker growth and the risk of disinflation remain clear. Market pricing suggests only limited further easing is expected through mid-2026, but political instability in France and the Netherlands could add downside pressure if combined with external shocks. Lower-than-expected inflation readings across the bloc add to the risks, while a strong US PCE print could further challenge EUR/USD support at 1.16.
Looking ahead
The key drivers for September are clustered around policy and politics. For the dollar, the PCE release and payrolls will guide expectations into the FOMC meeting, but structural headwinds remain. For sterling, domestic momentum and fiscal policy will set the tone, though the Bank of England faces a balancing act between growth and inflation risks. For the euro, political drama in France looms large, with bond markets already flashing warning signs. In short, all three currencies face a testing month ahead, shaped by the interplay of economic fundamentals and political uncertainty.
