USD

Optimism has returned to US markets late in the summer, with easing tensions over trade policy and growing confidence in forthcoming Federal Reserve rate cuts encouraging risk-taking. The US dollar has been under pressure as traders increasingly expect a softer policy stance, especially with signs of a cooling labour market that make a September rate cut and at least one more this year appear probable. The dollar index has fallen by almost 2% so far this month, undoing much of July’s advance.

President Trump’s appointment of Stephen Miran as a temporary Fed governor has bolstered expectations of a dovish tilt. Known for advocating a “Mar-a-Lago Accord” to weaken the dollar and enhance exports, Miran’s influence, though limited to a handful of meetings unless reappointed, aligns firmly with the softer policy camp. Meanwhile, the prospect of Christopher Waller becoming the next Chair reassures investors seeking stability. Yet Miran’s presence adds to the perception that dollar strength is politically unwelcome, which may keep downward pressure on the currency even if economic indicators improve.

Attention will now turn to upcoming US inflation figures, which could further shape market expectations for Fed action. With recent criticism from the administration over the reliability of official data, any unexpected results may prompt an outsized market reaction. With two inflation releases and one employment report before the September meeting, every piece of data will be closely scrutinised.

GBP

Sterling drew moderate support after the Bank of England delivered its anticipated rate cut last week but kept a distinctly hawkish tone. GBP/EUR has climbed back above €1.15, and GBP/USD is edging closer to $1.35 from its early-month low of $1.3142, with gains still heavily dependent on continued US dollar weakness.

The pound’s recent strength was partly due to buoyant global risk sentiment, which often favours higher-risk currencies like GBP. The BoE’s updated projections show inflation at 4% in September, limiting the case for additional easing this year. Yet with growth slowing and inflation staying high, the risk of stagflation is becoming more evident. This backdrop is compounded by fiscal strains, creating further structural challenges for sterling.

UK payroll data due this week is expected to confirm employment declines in most of the past nine months, though redundancies remain stable and hiring surveys indicate little change. The lack of clarity in the labour market complicates the BoE’s policy path and casts uncertainty over the pound’s ability to maintain its current trajectory.

The United Kingdom is awaiting the release of second quarter GDP figures on Thursday, with expectations pointing to a marked slowdown compared with the robust growth seen earlier in the year. If the GDP data confirms a sharp slowdown, it could weigh on the pound as markets may anticipate further interest rate cuts from the Bank of England to support the economy. A weaker growth outlook generally reduces currency appeal by signalling lower returns on investments and potentially looser monetary policy. However, if the slowdown is milder than expected, the pound could strengthen as traders revise down the likelihood of imminent policy easing.

EUR

The euro has made a strong recovery in August, gaining over 2% against the US dollar and reversing much of its July drop. While a push toward $1.20 had been expected later in the year, the latest surge in optimism suggests that target could arrive sooner. Factors include lower energy prices – supported by hopes of progress in Russia-Ukraine discussions – and the expectation of faster Fed rate cuts, which would narrow the interest rate gap between the US and the Eurozone.

Although recent Eurozone economic data has been underwhelming, sentiment indicators are improving. Germany’s ZEW Economic Sentiment Index has risen sharply this year, pointing to renewed confidence in manufacturing and fiscal support measures. Historically, this index has had a notable relationship with EUR/USD trends, making its latest rebound particularly relevant.

Geopolitics is also playing a role. President Trump’s upcoming meeting with President Putin to discuss Ukraine is not expected to produce major breakthroughs, but the earlier geopolitical risk premium in oil has faded. Attention has shifted away from tensions involving Iran and the Houthis toward weaker global demand. For Europe, falling energy costs generally support the currency’s terms of trade, and with political and economic tailwinds aligning, the euro could continue to benefit.

Looking ahead

The coming weeks will be pivotal, with US inflation and employment data likely to guide the Fed’s next move, the BoE balancing stubborn inflation against slowing growth, and Eurozone sentiment potentially improving further despite soft current data. Currency moves will hinge not just on economic fundamentals but also on political narratives and global market appetite for risk.