USD

The US dollar rallied sharply on Monday, marking its strongest daily advance of the month with a rise close to 1% against a basket of peers. This reversal followed earlier losses tied to Chair Powell’s dovish remarks at Jackson Hole, yet markets now appear to be reassessing the broader implications. Powell’s recognition of a higher neutral rate signals a possible shift away from the post-crisis era of entrenched low interest rates. While initial reactions focused on dovish guidance, investors are now weighing the likelihood that the long-standing “low for long” narrative is eroding.

Dollar sentiment was further supported by speculation that Governor Christopher Waller may become the next Fed Chair. His pragmatic reputation and backing from betting markets have reassured investors who worry about the central bank’s credibility. Still, tensions remain between the White House and the Fed, with President Trump’s push to remove Governor Lisa Cook stirring renewed fears of political interference. On the rates front, downward pressure on shorter maturities persists as signs of labour market weakness emerge, though political wrangling may slow the adjustment. Longer-dated yields are expected to face more upward pressure, creating curve steepening that could eventually weigh on the dollar.

GBP

Sterling slipped against the dollar on Monday, with GBP/USD retreating below $1.35 and remaining trapped between its 21- and 50-day moving averages. Against the euro, sterling weakened to a two-week low of €1.1523, although prospects of further losses in the euro could support a recovery.

On the domestic side, UK real interest rates have collapsed in the past year, sliding from 3.3% in September 2024 to just 0.2% today. Rising inflation coupled with successive Bank of England (BoE) cuts has eroded returns for investors, leaving the pound at a disadvantage against currencies supported by stronger real yields. Governor Andrew Bailey used his Jackson Hole appearance to underline the “acute challenges” confronting the British economy, including slowing growth and a shrinking workforce driven by demographic pressures and weaker post-pandemic participation.

The options market reflects this caution, with traders extending bearish positions on sterling for eight consecutive sessions despite an almost 2% gain in August. With few major UK data releases this week, month-end flows could dominate price action, and thin liquidity in August heightens the risk of sudden volatility.

EUR

The euro weakened at the start of the week, sliding 0.7% against the dollar as political tensions in France unsettled markets. Prime Minister François Bayrou faces a confidence vote on 8 September over his contentious €44 billion austerity plan, with opposition parties determined to block him. French bond yields have surged to their highest level since March and spreads versus German bunds have widened considerably, intensifying the pressure on the single currency.

The euro also remains weighed down by fading hopes of a peace breakthrough in Ukraine and the ongoing struggle to shake off the effects of trade disputes. Against this backdrop, Powell’s dovish tone at Jackson Hole provided only limited support. While markets see about 21 basis points of Fed easing priced for September, the euro’s potential upside remains capped by fragile sentiment and concerns over French political stability.

Looking ahead

Attention now turns to the US PCE inflation report due on Friday, with consumer confidence data providing an early signal today. A softer PCE print could see EUR/USD edge toward the 1.17 level, though political risks in Europe and a fragile US outlook make sustained moves difficult. Month-end positioning, alongside the approaching US holiday, points to heightened volatility across major pairs. Investors should prepare for larger swings driven as much by liquidity as by fundamentals.