Dollar holds steady as markets eye the Fed
The S&P 500 continues to show resilience, clocking four record closes in just eight sessions this month. Optimism around a “soft landing” and the strength of big tech remain key drivers, but they sit against a more cautious backdrop in bonds. Since mid-July, ten- and thirty-year Treasury yields have drifted lower, signalling investors are starting to price in slower growth. The thirty–ten-year Treasury spread stands at 0.64%, above its long-term average of 0.49%, reflecting concerns about the pace of the economy.

Attention now turns to this week’s Federal Reserve meeting, where a rate cut is widely anticipated and largely priced. Markets are betting on at least three reductions over the year, although sticky inflation remains a risk, particularly as the full impact of tariffs emerges. If price pressures from tariffs or services resurface, the Fed may have to pause after an initial move, potentially undermining equity strength. Stagflation is not yet evident in the data but remains a watchpoint.

The prospect of easing has taken some shine off the dollar, which has slipped 2.7% since the start of August, yet its range has narrowed to between 97 and 99 on the DXY. Low volatility suggests traders are waiting for a significant jolt — either a sudden inflation spike or a steep fall in hiring — to break the calm. If the soft-landing narrative falters, the dollar could benefit from a flight to safety.

The upcoming meeting is likely to be lively, with questions for Chair Powell expected to span inflation pass-through, labour market weakness, board composition and his Jackson Hole comments. Markets will watch for any signal on how the Fed balances its dual mandate as it considers a fresh easing cycle.

Euro weighs its upside
EUR/USD’s climb towards 1.20 depends largely on the US story. Softer American data and expectations of Fed easing have been the main props for the rally, while the ECB appears content to pause further cuts. Euro strength could gain support if fiscal stimulus begins to lift growth, although trade tensions continue to present a downside risk.

Since “liberation day”, the single currency has been the favoured way to express dollar scepticism, advancing more than ten per cent. Yet vulnerabilities remain inside the bloc. France’s political upheaval led to a Fitch downgrade last week, although President Macron’s appointment of a centrist prime minister helped steady nerves and kept the French–German yield gap contained.

ECB policy is on hold after last week’s decision, and President Lagarde emphasised that rates are set appropriately with no urgency for extra easing. This slightly firmer tone helped anchor EUR/USD closer to relative yield spreads. Over the near term, attention will be on eurozone trade figures, industrial output, final August inflation data and the ZEW surveys. These forward-looking indicators will be important for gauging whether the euro can extend gains or if local risks begin to limit upside potential.

Sterling relies on a hawkish BoE
Sterling continues to draw support from the Bank of England’s firm policy stance, even as the UK’s growth picture stays subdued. Recent data, including weak industrial production and slow GDP, underline the economy’s fragility. Fiscal uncertainty is also building ahead of the autumn budget, with speculation about further tax increases.

GBP/USD remains underpinned in the short term by the gap between Fed and BoE policy expectations. While the Fed is expected to ease this week, the Bank of England is forecast to hold, with inflation still uncomfortably high and its pace of loosening likely to remain gradual at one cut per quarter.

This week brings the UK employment report on Tuesday and CPI on Wednesday. Neither is expected to prompt an immediate move, but both will guide the market’s view on whether November is the likely point for the next cut. Against the euro, sterling ended last week only slightly higher after soft domestic data. Unless the Bank signals a dovish turn, elevated short-dated UK yields keep the pound a relatively expensive sell versus the euro.

For now, sterling’s steadiness rests on the BoE’s hawkish posture. Yet structural headwinds — sluggish growth, fiscal questions, and the risk of a rate cut later in the year — leave the balance of risks skewed to the downside.