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It is a pivotal week for global FX markets, with participants laser-focused on the central bank double-header: the Federal Reserve on Wednesday evening and the Bank of England at midday on Thursday.
The tone was set early by a blockbuster US labour market print from last Friday. Non-farm payrolls rose by 162,000 in August against consensus forecasts in the mid-53,000s, dramatically repricing Fed expectations and giving the Dollar a strong footing heading into the week.
That jobs beat, combined with US CPI remaining at 3.4%, firmly cemented market expectations of a Fed hike on 16th September - the first hike-in-September narrative of this cycle. GBPUSD moved back below 1.3500, with EURUSD falling to the mid-1.1500s, a one-month low.
Across the Atlantic, the ECB delivered its widely anticipated 25bp rate increase last Thursday. With the ECB having already hiked in June, this move brings total tightening to 50bp across three meetings, and the debate is now shifting from whether to hike to whether any further tightening is warranted.
Eurozone CPI at 2.9% and sticky services inflation are keeping policymakers cautious about declaring victory. In the UK, a stronger-than-expected GDP print of 0.4% month-on-month in July surpassed forecasts, with services leading the expansion and giving Sterling a late-week lift.
This reinforced the hawkish wing of the MPC heading into this Thursday's BoE decision. UK CPI rose to 2.9% in the twelve months to July, up from 2.6% in June, with services inflation easing slightly to 3.4%, maintaining pressure on the committee. Three MPC members are already voting for 4%, making the BoE meeting the key domestic event of the month.
The broader macro picture remains one of elevated inflation across all three blocs - the US, Eurozone and UK - resilient but cooling labour markets, and central banks threading the needle between tightening enough to anchor expectations without tipping their economies into contraction.
If energy prices stay elevated, all three central banks may be holding higher rates for longer than their own projections currently assume. With the geopolitical backdrop, particularly Middle East tensions, continuing to support energy prices and safe-haven Dollar demand, the path forward for GBP and EUR remains data-dependent and event-driven.
GBPUSD | Range last week: 1.3495 - 1.3565
Sterling had a mixed week, caught between two competing forces: Dollar strength driven by the NFP beat and Fed hike expectations on one side, and increasingly hawkish domestic fundamentals on the other.
GBPUSD held graphical support at 1.3506 through much of the week, the level where August's advance began, before finding a late-week bid on the back of the GDP surprise.
UK GDP grew 0.4% month-on-month in July, against a market expectation for a contraction of 0.1%, which raises the odds of a Bank of England rate rise this month. The inflation picture added further pressure on the MPC.
UK CPI rose to 2.9% in the twelve months to July, up from 2.6% in June, with core CPI unchanged at 2.6% and services inflation easing to 3.4%. The increase came mainly from the Ofgem energy price cap rise.
Crucially, Sterling's strength against the Euro is not a UK growth story; it is a rate-differential story, and rate differentials can close quickly. GBPEUR has risen past the mid-1.1600s, where it lulled for much of last week.
A significant risk to watch heading into the BoE decision is the gilt market. UK ten-year gilt yields reached a 19-year high near 5.4% on Thursday 10th September, and rising borrowing costs are the main risk to Sterling's rate-driven support.
With the MPC vote at 6-3 in July, three members already voting for 4%, and August CPI due on 16th September, the day before the BoE decision, GBP volatility is likely to be elevated.
GBPEUR | Range last week: 1.1626 - 1.1663
The Euro's week was dominated by Thursday's ECB decision, but the market reaction told the real story.
The European Central Bank raised its deposit rate by 25 basis points to 2.5% on 10th September, the second hike of 2026, following June's move and a pause in July. President Christine Lagarde described the decision as unanimous and straightforward, while stressing that policy will be set meeting by meeting and that the Council is not pre-committing to any rate path.
With the hike fully priced, the Euro barely responded. EURUSD slipped below 1.1600 after the announcement, recovered into the New York close and held near 1.1610 in early Asian trading on 11th September.
The muted reaction owes more to the Dollar than to the Euro. Hot US producer prices and a live Federal Reserve meeting on 16th September are pulling harder on the pair than anything the ECB delivered.
The updated inflation forecasts from Frankfurt were notably hawkish on the longer-term outlook. Inflation forecasts for 2027 and 2028 were revised up to 2.5% and 2.1%, while growth was upgraded to 0.9% in 2026 and 1.4% in 2027.
Eurozone headline CPI has also accelerated. Inflation rose to 3.3% in August from 2.9% in July, marking its highest level since September 2023.
The key question for EUR going forward is whether the ECB is done or whether the energy shock forces further tightening. A Reuters poll found that 91% of economists expect the deposit rate to finish 2026 at 2.5%, while interest-rate markets have been pricing the possibility of another increase. The next ECB meeting on 29th October is therefore firmly in focus.
EURUSD | Range last week: 1.1652 - 1.1595
The Dollar closed last week firmer, recovering from an unsettled start. Thin liquidity around the US Labor Day holiday left the Greenback on the back foot early on, and it came under further pressure as the Japanese yen surged on expectations of Bank of Japan tightening and talk of fresh intervention.
The mood turned as the week wore on, however, with a deterioration in global risk appetite reviving safe-haven demand. Escalating Middle East tensions drove oil prices sharply higher and stirred renewed turbulence in bond markets.
Although a later pullback in crude tempered that support, firm inflation figures cemented bets on a Fed hike and carried the Dollar higher into the close.
Those inflation readings have all but sealed the near-term outlook. August CPI held at a lofty 3.4%, with the monthly pace quickening and producer prices also running hot, lifting the market-implied probability of a 25bp hike to above 80%. With the labour market still robust, the case for the Fed to move has firmed considerably.
Wednesday's Fed decision is the week's centrepiece. A hike is widely anticipated but not yet fully priced, leaving room for the Dollar to gain - particularly if the accompanying guidance hints at further tightening ahead.
August retail sales, housing starts, industrial production and jobless claims round out the calendar.
Important Data Releases
Monday: CAD CPI (1:30pm), EU ECB President Lagarde speech (4:15pm)
Tuesday: China Industrial Production and Retail Sales (3am), UK Employment and Unemployment Rate (7am), German ZEW Economic Sentiment (10am), EU ZEW Economic Sentiment (10am), US Empire State Manufacturing Index (1:30pm)
Wednesday: UK CPI, PPI and RPI (7am), EU Industrial Production (10am), US Retail Sales (1:30pm), US Fed Interest Rate Decision (7pm), US FOMC Press Conference (7:30pm), NZD GDP Q2 (11:45pm)
Thursday: EU HICP Final (10am), UK BoE Interest Rate Decision (12pm), US Initial Jobless Claims (1:30pm), US Philadelphia Fed Manufacturing Survey (1:30pm)
Friday: AUD RBA Governor Bullock speech (12:30am), JPY National CPI (12:30am), JPY BoJ Interest Rate Decision (time TBC), German PPI (7am), UK Retail Sales (7am), US Industrial Production (2:15pm)
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