GBP

Sterling experienced volatile trading last week, first rallying past $1.37 on the back of the Fed’s policy shift and robust UK wage and services inflation, then slipping below $1.35 despite the Bank of England leaving rates unchanged. This retreat indicates that sterling’s upward momentum may be fading, even with its relative yield advantage. Options markets reinforce this caution, showing bias towards further weakness at longer maturities.

The pound’s fragility was underscored by the release of August borrowing data, which revealed a deficit of £18.0bn – the highest August figure in five years. Fiscal concerns resurfaced, and against the euro, sterling remained confined within a narrow €1.1450–€1.16 range. Elevated front-end yields continue to provide some underpinning, but risks from slowing growth, fiscal strains and stagflation remain.

Britain’s broader fiscal outlook is also weighing on the currency. Public borrowing for the current financial year is already £11.4bn above projections, with rising spending outpacing gains in tax revenues. Debt now equates to 96.4% of GDP, raising concerns about the government’s capacity to manage issuance without unsettling bond markets. Unless Chancellor Rachel Reeves outlines convincing measures in November’s budget, further sterling weakness is likely, as the market braces for either spending restraint or additional taxes.

USD

The US dollar is closing the third quarter nearly 1% stronger, reflecting a closer alignment between price action and underlying American economic conditions. Earlier in the year, the Federal Reserve’s hawkish stance drove the currency’s strength, but that momentum has eased. While fundamentals now exert less upward force, the dollar is no longer as vulnerable to sharp sell-offs on negative headlines, particularly with tariff concerns largely receding.

Recent trading suggests the greenback has become more reactive to data surprises. Market positioning has been influenced not only by sentiment but also by the perception that growth could falter or inflation persist. This explains why deviations from forecasts tend to provoke stronger reactions than before. A case in point was the Fed’s latest meeting: markets expected a softer tone after weak labour market data, but instead received a firmer message. The dollar swiftly recovered its earlier losses and closed the week slightly higher.

With the personal consumption expenditure (PCE) report due, traders will watch closely for any sign of easing inflation. A softer reading could nudge the currency downwards, though support around the 97 level remains likely to hold.

EUR

The euro benefited last week from a significant shift in relative rate expectations. While the European Central Bank seems to have ended its easing cycle, the Federal Reserve has only just begun lowering rates, which tips the balance modestly in favour of the common currency. Markets already expect at least two further US cuts, capping the extent of euro gains. Still, EUR/USD has held more firmly above the 1.17 level, an improvement on its summer struggles.

The single currency, however, remains heavily reliant on US weakness for progress. With little fresh momentum from within the eurozone, euro bulls are looking towards disappointing American data to drive EUR/USD closer to 1.18. This week’s calendar offers few European highlights, with PMIs the main focus.

Looking ahead

Currency markets are increasingly data-driven, with sentiment shifting rapidly when outcomes diverge from expectations. For the US dollar, inflation data will be the defining driver in the near term. Sterling faces mounting fiscal headwinds and the risk of disappointing growth data, with the November budget likely to be a turning point. The euro, meanwhile, depends largely on the Fed’s trajectory and whether US data undercuts the case for tighter policy.

In short, all three currencies are entering the final quarter finely balanced, with incoming data and policy signals set to determine direction more than long-standing narratives.