GBP

Sterling rallied strongly following the US jobs report, briefly testing resistance at 1.3550 before easing back to close near 1.35. The move marked the pair’s best daily performance in two weeks and pushed it back above key technical averages. Momentum indicators are neutral, leaving scope for further gains if conditions allow.

Nevertheless, the domestic backdrop remains shaky. The UK economy faces risks of stagnant growth and fiscal strain, issues that could weigh on the pound in time. Even so, this is currently a dollar-driven story, with Fed expectations overshadowing UK fundamentals. Should US inflation surprise to the upside, the dollar could claw back lost ground, limiting sterling’s momentum.

On the interest rate front, the Bank of England has shown more caution about continuing with quarter-point cuts. Governor Bailey has indicated growing uncertainty about whether inflation is falling quickly enough. This has helped keep short-term UK yields supported relative to European counterparts, providing the pound with some underpinning.

USD

The greenback weakened after the latest employment figures revealed that only 22,000 jobs were created in August, falling well short of the 75,000 forecast. Previous months’ numbers were revised down by a further 21,000, reinforcing the view that labour market conditions are cooling. This has spurred speculation that the Federal Reserve might opt for a half-point rate cut at its next meeting.

Bond yields at the shorter end of the curve slipped as traders moved quickly to price in more aggressive easing. Dollar losses were sharpest against sterling, with GBP/USD climbing to 1.35 immediately after the release, from 1.3450 beforehand. While the dollar has been surprisingly resilient through the middle of the year, this softer data raises questions about whether the tide is turning. However, persistently high inflation will limit the Fed’s freedom to loosen policy too aggressively, suggesting any downturn in the currency may be temporary.

Markets are now fixated on forthcoming inflation readings. Should the numbers come in weak, the case for substantial easing strengthens; conversely, firmer core CPI could dampen the enthusiasm for cuts and stabilise the dollar.

EUR

The single currency broke higher against the dollar, moving decisively above the 1.16–1.17 range after the US data. With the European Central Bank expected to leave policy unchanged this week, euro strength appears rooted more in dollar weakness than fresh local drivers.

Investor appetite for hedging against euro gains has been subdued, reflecting concerns about European political risks and unresolved trade frictions with the US. While EUR/GBP briefly advanced after the jobs release, the move faded, and the franc showed greater demand as a safe-haven alternative. This suggests that investors are spreading exposure rather than relying solely on the euro in risk-off periods.

Short-term euro rates are likely to remain stable if the ECB confirms the end of its cutting cycle, offering modest support. However, the broader outlook depends heavily on how US inflation unfolds, as a rebound in the dollar could quickly reverse recent euro gains.

Looking ahead

The global focus is on Thursday’s US CPI release, which may set the tone for the remainder of September. A softer print could deepen dollar losses and extend gains for both the euro and sterling, whereas a hotter reading risks triggering a sharp reversal.

In the UK, Friday’s GDP data is the main domestic event, with growth expected to have stalled in July. For Europe, the ECB’s decision will be closely watched, though no changes are anticipated. Overall, while short-term momentum favours further dollar weakness, the interplay between US inflation and Fed policy will determine whether recent moves prove the start of a broader trend or simply a temporary adjustment.