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Currency markets enter the week in a state of heightened policy sensitivity, with two central bank decisions approaching - the ECB on Thursday 10 September and the Federal Reserve on Wednesday 16 September. These key meetings are set to dominate price action across G10 pairs. The broader macro backdrop is one of stubborn inflation, diverging growth outlooks, and a Fed that has shifted from an easing bias to a genuine tightening debate in the space of just a few weeks.
The primary driver of the week's moves will be the Federal Reserve. Chair Kevin Warsh's hawkish debut at Jackson Hole in late August fundamentally repriced Dollar expectations, with markets moving from pricing cuts to pricing a live hike at the September FOMC. Friday's August NFP print - 162,000 jobs added against a consensus of just 56,000 - reinforced that shift and kept the Dollar supported heading into the weekend. The probability of a September hike sits at roughly 50–60% following some softening mid-week from Fed Governor Waller, who indicated officials could "wait one meeting" absent an inflation surprise. That ambiguity leaves the Dollar in a range rather than in a trend, with DXY hovering near 99.00–99.70 and likely to stay there until the FOMC decision on 16th September. Further data points - particularly CPI and PPI releases due later in the month - will shape the final read. In terms of risks to the broader FX outlook, the key upside risk to the Dollar, those ready to place hedges should be aware that volatility around these events could be sharp and short-lived; clients with pending EUR or GBP transactions may wish to consider their timing accordingly.
GBPUSD | Range last week: 1.3563 – 1.3474
Sterling has held up well against the Dollar despite the broadly supportive US data backdrop, with GBP/USD trading around 1.3515 heading into the week. The Pound has found support from hawkish signals within the Bank of England - Chief Economist Huw Pill's explicit call for Bank Rate to reach 4% and his warnings around entrenched second-round inflation effects have underpinned Sterling's resilience and kept the market positioned for further tightening. However, the domestic backdrop is becoming increasingly complex. Gilt yields have surged to multi-decade highs, with the 30-year touching 5.85% - a level last seen in 1998 - and the 10-year hitting its highest since the 2008 financial crisis, as the global bond sell-off collided with UK-specific fiscal concerns. Bloomberg Economics estimates the recent jump in borrowing costs has trimmed the government's fiscal buffer by approximately £12 billion, compressing the headroom ahead of Chancellor John Healey's first budget on 28th October.
Prime Minister Andy Burnham's government, which took office in late July following Keir Starmer's departure, has sought to reassure markets of its commitment to fiscal discipline, but his indication that he would seek flexibility within the existing fiscal rules prompted a sharp gilt market reaction and has left Sterling sensitive to any further signals of fiscal loosening. Sterling remains under pressure from concerns over energy-driven inflation and the UK's fiscal outlook, despite Burnham's efforts to reassure markets. For now, cable is cushioned by BoE hawkishness and the relative rate differential, but the October budget represents the single biggest near-term risk event for the Pound - any move to formally alter the borrowing rules or signal materially higher gilt issuance could trigger a sharp repricing reminiscent of the 2022 mini-budget episode.
GBPEUR | Range last week: 1.1677 – 1.1614
The Euro has steadied above 1.1600 after a choppy week, with the market now firmly focused on Thursday’s ECB's September meeting. A Reuters poll of 65 economists shows unanimous consensus that the ECB will raise its deposit rate by 25 basis points to 2.50% on 10th September. Euro area headline inflation held at 3.3% in August, with energy costs the primary driver, though core inflation eased to 2.4%. The ECB faces a difficult balancing act - the risk of tipping an already fragile economy into recession is likely to keep the pace of tightening slow and steady beyond September. EUR/USD has found technical resistance around the 1.1600–1.1650 zone. The three-month forecast range sits at 1.1300–1.1900, with limited directional conviction given the narrow rate differential between the Fed and ECB.
Germany’s Sunday state election in Saxony-Anhalt delivered a landmark result for German politics, with the far-right Alternative for Germany securing 43.8% of the vote - more than double the 17.2% for Chancellor Friedrich Merz's incumbent CDU. Despite the scale of the victory, the AFD fell three seats short of a majority in the 83-member state parliament, leaving the path to government formation unclear. The result reflects the deep unpopularity of Germany's ruling coalition and the continued rise of hardline parties in a fracturing political landscape. For EUR, the broader implication is one of sustained political fragmentation in Europe's largest economy at a time when the ECB is navigating a delicate tightening cycle - Euro sentiment is likely to remain sensitive to any signs that federal-level governance is further destabilised.
EURUSD | Range last week: 1.1567 - 1.1637
The Dollar had a choppy week, swinging with the turmoil that gripped global bond markets. The Greenback opened firmly, drawing haven demand as a sharp sell-off in sovereign debt - driven by renewed inflation and fiscal-sustainability fears, with surging oil prices adding to the case for rates staying higher for longer - unsettled investors. Those gains proved short-lived, however, as the anxiety faded mid-week and risk appetite recovered. Dovish comments from Fed policymaker Chris Waller, who signalled he could back holding rates steady if inflation cooperates, then triggered a repricing of hike expectations and dragged the Dollar lower still.
The picture shifted again late in the week. August payrolls comfortably beat forecasts, with the economy adding 162,000 jobs against expectations nearer 56,000, handing the Dollar a modest rebound. The strong print has revived the debate over a September move, though it remains far from settled - markets last put the odds of a 25bp hike this month at around 59%, with a rise fully priced only by December.
The week ahead hinges on Friday's US CPI, the last major inflation reading before the Fed's 16 September decision. A softer number would cast fresh doubt over a hike and could pull the Dollar sharply lower. Producer prices land on Thursday, alongside jobless claims, with three-, ten- and thirty-year Treasury auctions running through the week.
Important Data Releases
Monday: EU Sentix Investor Confidence (9:30am), EU GDP Q2 (10am), EU Employment Change Q2 (10am)
Tuesday: UK BRC Like-For-Like Retail Sales (12:01am), JPY GDP Q2 (12:50am), China Trade Balance (4am), German Trade Balance (7am), US ADP Employment Change 4-week average (1:15pm)
Wednesday: China CPI & PPI (2:30am)
Thursday: German HICP Final (7am), EU ECB Interest Rate Decision (1:15pm), US Initial Jobless Claims (1:30pm), US PPI (1:30pm), EU ECB Press Conference (1:45pm)
Friday: UK GDP (7am), UK Industrial & Manufacturing Production (7am), US CPI (1:30pm), US Michigan Consumer Sentiment (3pm)
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