EUR

The euro struggled through the last session, losing nearly 0.4% against the dollar at one point. Concerns over French politics weighed heavily, following the Prime Minister’s failed confidence vote, which discouraged buyers from testing the late-July high of $1.1789. A brief rise in oil prices, triggered by reports of Israeli strikes in Doha, also acted as a drag since higher energy costs tend to hurt currencies of energy importers such as the eurozone.

Later in the day, losses eased somewhat after President Macron appointed Sebastien Lecornu as Prime Minister and tasked him with steering the 2026 budget through parliament. The move helped calm some of the political nerves. Looking ahead to the ECB meeting, volatility remains subdued, with options data showing markets view US figures as more influential than ECB policy in the near term. ECB President Lagarde is likely to keep a steady tone, highlighting positive surprises such as stronger PMIs and falling unemployment, which supports the idea that the ECB is under little pressure to cut again soon. Nonetheless, uncertainty around global trade discussions with the United States suggests caution will remain the message.

The euro has outperformed most peers this year, largely because investors believe the ECB has ended its rate cutting cycle. However, markets are forward-looking. Any suggestion that more cuts could be considered later this year or early next could weaken that confidence. Analysts see scope for the currency to face setbacks if expectations build for fresh easing. For now, the pound has gained ground against the euro, touching 1.1550, its strongest level in over a week, with the prospect of 1.16 within reach should Thursday’s ECB meeting disappoint euro bulls.

GBP

Sterling’s recent rally stalled after touching a one-month high near $1.36, reversing sharply despite softer-than-expected US payrolls data. A rebound in oil prices partly explains the move, as higher import costs weigh on the UK while giving some support to the dollar. Domestically, retail sales surprised positively in August, with a 2.9% year-on-year rise against expectations of 2%. Together with wages continuing to outpace inflation, this could lend short-term support to consumer confidence.

Yet broader challenges persist. Growth remains lacklustre, inflation sticky, and fiscal concerns are unlikely to ease before November’s budget statement. While relatively high yields lend some support to sterling, these are often seen as a sign of strain rather than strength when inflationary risks dominate. Investor positioning also signals potential downside: bearish bets on the pound have risen but the price has not fully adjusted, leaving GBP/USD vulnerable if sentiment worsens.

The Bank of England, meanwhile, appears in no rush to cut rates. Some economists expect no move until March, which in relative terms may offer the pound more support than the euro if the ECB considers fresh easing. Still, structural headwinds mean sterling’s upside looks capped.

USD

The long-held narrative of American labour resilience has been dealt a serious blow. A preliminary revision from the Bureau of Labor Statistics showed an enormous downward adjustment of 911,000 jobs for the period between April 2024 and March 2025. This equates to roughly 76,000 fewer jobs created per month than previously reported, a figure that sharply reshapes perceptions of recent economic strength.

The June non-farm payrolls report has also been revised to show a loss of 13,000 jobs, the first negative figure since December 2020. With health care the only sector showing consistent growth, weakness elsewhere looks broad-based. Most of the revision affected the private sector, with government jobs also slightly reduced. The revisions highlight reliability issues in labour data collection, with survey response rates continuing to fall.

Financial markets have not yet fully absorbed the implications, but the revision increases pressure on the Federal Reserve as it weighs policy options. A stagflation scenario, where inflation remains persistent while employment falters, is a rising risk. Much will depend on the next inflation report. If consumer prices run hotter than expected, rate cut bets may have to be adjusted sharply, fuelling volatility. For now, markets still expect nearly three cuts by the end of 2025, but the credibility of that outlook is increasingly in doubt.

Looking ahead

The next few weeks are pivotal. For the euro, Thursday’s ECB decision will shape whether its year-to-date strength can hold or whether doubts over further cuts begin to take root. For sterling, fiscal worries and a sluggish economy remain barriers to a sustained rally, despite retail data providing a short-term boost. For the dollar, the immediate test comes from the upcoming CPI release and the Fed’s September meeting, where the risk of stagflation will loom large.

Currency markets are entering a period where economic data surprises, policy expectations, and political developments are likely to dictate sharp moves. Investors should brace for heightened volatility and shifting narratives as the final quarter of 2025 approaches.