Dollar softens as retail sales outshine, Fed in focus
US retail sales for August surprised on the upside, with total purchases rising 0.6% and the control group up 0.7%, beating forecasts. July’s figures were revised higher, pointing to resilient household spending despite tariffs, a subdued labour market, and lingering price pressures. A buoyant equity market may also have supported confidence over the summer, while expectations of easier policy have underpinned sentiment among consumers and firms.

Even so, the data did little to alter expectations for a rate cut at today’s Federal Reserve meeting. Because the figures are not inflation-adjusted, they offer limited evidence against an easing move, particularly with tariffs still feeding through to prices. Positioning ahead of the meeting weighed on the dollar, sending the DXY down around 0.7% yesterday towards year-to-date lows near 96.38.

Investors see the start of the Fed’s easing cycle as unusually bearish for the greenback, compounded by concerns over the central bank’s independence and the risk of a more aggressive policy path under new leadership next year. With hedging costs falling as rates decline, demand for protection against further dollar weakness remains strong. Support near 96.60 should hold today, although a balanced but dovish message from Chair Powell could prompt a rebound above 97 if speculative bets unwind.

Euro extends rally towards key levels
The euro has climbed to a four-year high against the dollar as traders anticipate a Fed cut that will underline the policy gap with the European Central Bank. EUR/USD has risen more than 14% this year, a move echoing 2017’s rally, and is firmly tied to yield differentials after last week’s dovish repricing of Fed expectations.

Sentiment improved further after German ZEW expectations increased to 37.3 in September, suggesting tentative optimism despite weak current conditions. Fiscal expansion and supportive ECB policy are encouraging hopes of a modest recovery, though the delayed drag from higher US tariffs on German exports remains a risk.

Technically, the pair has cleared an important resistance area, leaving the path open towards 1.20. Options markets show steady demand for euro calls, indicating expectations for another push higher. Still, flows into European equities have lost momentum, according to Bank of America’s latest survey, hinting that asset-allocation support for the currency may fade and temper the advance later this year.

Sterling holds gains after data, policy support
Sterling touched 1.3672 against the dollar yesterday, its highest in two months, after robust labour-market numbers and steady inflation reinforced the view that the Bank of England will hold rates. Pay excluding bonuses rose 4.8% year on year in the three months to July, slower than in previous readings but still above the level compatible with the Bank’s 2% target.

Headline inflation increased 3.8% from a year earlier, broadly in line with forecasts and at an eighteen-month high. Markets assign only a minimal chance of a cut at Thursday’s BoE meeting, supporting sterling as investors look for confirmation that policy will stay firm.

The pound’s footing at these levels remains delicate. Structural challenges and option-market positioning still point to caution beyond this week, with only near-term contracts showing demand for sterling. GBP/USD is eyeing early-July highs above 1.37, but much depends on the tone of Powell’s press conference. A measured but still dovish Fed could lift the dollar and pull the pair back under 1.36.