Sterling supported by firm BoE stance

Sterling climbed beyond 1.36 dollars this morning, building on its strongest close since early July after UK labour-market data strengthened expectations that the Bank of England will keep rates steady. Regular pay, excluding bonuses, rose 4.8% in the three months to July, the slowest increase since May 2022 but still above levels consistent with the BoE’s inflation target. Pay slowed in both public and private sectors but remains high enough to keep policymakers cautious.

Unemployment held at 4.7%, matching forecasts and the highest since mid-2021. Employment increased by 232,000 over the same period, showing resilience even as demand begins to cool. Taken together, the figures suggest a labour market that is easing but still tight enough to sustain wage-related inflation pressures.

For the Bank, these numbers support a wait-and-see approach, leaving rate cuts off the table for now. Markets see little scope for near-term easing, helping GBP/USD hold recent gains as policy divergence with the Fed widens and domestic fiscal concerns remain largely on the sidelines.

Dollar softens as markets await the Fed

The US dollar has slipped to its lowest level in almost two months, tracking Treasury yields lower as investors position for Wednesday’s Federal Reserve decision. A quarter-point cut is fully priced, with only a slim chance of a half-point move after recent evidence of labour-market cooling. Attention will focus on the Fed’s updated economic projections, particularly the interest-rate path, with expectations pointing towards continued easing into year-end.

The vote split will be closely watched, since a three-way division among FOMC members has not occurred since 2019. Markets are also monitoring whether Stephen Miran’s confirmation as a Fed governor will come in time to affect this week’s outcome.

Beyond the meeting, data releases will help shape sentiment. August retail sales arrive on Tuesday, while Thursday brings jobless claims and July’s TIC flow figures. A jump in claims last week briefly pressured the dollar, and the TIC numbers will be studied for signs that foreign investors may be moving from hedging towards outright selling of US assets.

Equity markets remain buoyant, with record highs and strong demand for carry trades reflecting confidence in a 125 to 150 basis-point easing cycle unfolding without recession. Yet history shows that an upside surprise in US growth could challenge the consensus for further dollar weakness later in the year.

Euro lifted by policy divergence

EUR/USD has begun the week on firmer ground, up around 0.3%. Expectations of a dovish message from the Fed on Wednesday are weighing on the greenback, while the euro side is supported by firm guidance from the European Central Bank. Isabel Schnabel warned on Monday that food inflation is rising again, a risk for consumer expectations, and highlighted a solid rebound in domestic demand despite global challenges. Her remarks echoed President Lagarde’s comments last week, reinforcing a cautiously hawkish stance.

Should the Fed’s projections signal more easing than markets currently expect, EUR/USD could extend towards the 1.18 area, retesting its July high near 1.1830. Political concerns around France remain largely contained despite Fitch’s downgrade and recent yield moves. For now, the market treats these issues as localised, although Moody’s and S&P decisions in late October and November will be watched for further signals on France’s rating outlook.