FX at the Crossroads:
Inflation, Interest Rates & Geopolitics Take Centre Stage
Key Highlights
- Dollar gets a payroll boost but struggles to break higher. U.S. non-farm payrolls surprised strongly to the upside, with 162,000 jobs added in August versus 56,000 expected, pushing the market-implied probability of a September Federal Reserve rate rise to around 57%. The dollar initially rallied but subsequently surrendered part of its gains.
- GBP/USD starts the week around 1.35. Sterling was trading near $1.3513 on Monday morning, having remained relatively resilient despite higher global yields, elevated energy prices and renewed expectations for tighter U.S. monetary policy.
- EUR/USD remains close to 1.16 ahead of a pivotal ECB meeting. The euro begins the week near $1.1610, with Thursday’s ECB decision likely to be one of the week’s largest FX catalysts.
- ECB rate rise widely expected. All 65 economists surveyed in Reuters’ latest poll expect the ECB to increase its deposit rate by 25 basis points to 2.50% on Thursday, following renewed inflation pressure caused largely by higher energy costs.
- Oil remains an important FX variable. Continued Middle East tensions and elevated energy prices are complicating the inflation outlook across the U.S., UK and euro area, potentially keeping central banks restrictive for longer.
- S. inflation now takes centre stage. Thursday’s PPI and Friday’s CPI reports could ultimately determine whether the Federal Reserve raises rates at its 15–16 September meeting.
Market Recap…
Currency markets endured another volatile week as rising energy prices, higher global bond yields and shifting central-bank expectations competed for traders’ attention. Sterling began September close to $1.3550 before slipping towards $1.3520, leaving GBP/USD modestly lower across the week. EUR/USD was comparatively stable, ending Friday around $1.1614, while EUR/GBP edged higher towards 0.8590, indicating slight euro outperformance against sterling.
The week’s largest USD catalyst arrived on Friday. U.S. employers added 162,000 jobs in August, almost three times the 56,000 consensus forecast, while unemployment remained at 4.1%. The dollar jumped immediately as traders increased bets on another Fed hike, although the move faded as attention quickly shifted towards this week’s inflation figures. Meanwhile, euro-area inflation accelerated to 3.3% in August, strengthening expectations that the ECB will tighten policy again this Thursday.
Our Thoughts for the Week Ahead…
This week has the potential to produce considerably more volatility, particularly from Thursday onwards. EUR/USD will initially centre on the ECB, where a 25bp increase in the deposit rate to 2.50% is the consensus expectation. With the hike largely discounted, President Lagarde’s guidance could matter more than the decision itself. A willingness to contemplate further tightening would support the euro, whereas presenting Thursday’s move as an “insurance hike” followed by a prolonged pause could limit EUR gains.
For the dollar, Friday’s U.S. CPI is arguably the week’s biggest event. Following the strong payroll figures, a hotter inflation print could considerably strengthen expectations of a September Fed hike and support USD. Softer core inflation would reopen the debate and could push GBP/USD and EUR/USD higher. Sterling also faces a significant domestic test on Friday through July GDP and trade figures. With GBP/USD around 1.35, we expect Thursday and Friday’s releases — rather than Monday’s holiday-thinned trading — to provide the week’s clearer direction.
Economic Calendar
Monday
No major GBP, EUR or USD economic releases scheduled.
U.S. markets closed for Labor Day.
Tuesday
No major GBP, EUR or USD economic releases scheduled.
Wednesday
6:00PM EU ECB President Lagarde Speech
Thursday
1:15PM EU ECB Monetary Policy Decision
1:15PM EU ECB Interest Rate Decision
1:30PM US Core Producer Price Index (PPI) m/m
1:30PM US Producer Price Index (PPI) y/y
1:45PM EU ECB Press Conference
Friday
7:00AM UK GDP m/m — July
7:00AM UK UK Trade Balance
7:00AM UK Industrial / Production Data
1:30PM US Consumer Price Index (CPI) m/m
1:30PM US Consumer Price Index (CPI) y/y
1:30PM US Core Consumer Price Index
1:30PM US Real Earnings