RATE HIKES BACK IN THE SPOTLIGHT
Key Highlights
- USD starts the week on the front foot as sticky US inflation, rising Treasury yields and oil above $100 strengthen expectations that the Federal Reserve could raise rates on Wednesday. Markets entered Monday pricing roughly an 86–87% probability of a 25bp Fed hike.
- Sterling remains resilient near the $1.35 area following stronger-than-expected UK growth. July GDP rose 0.4% month-on-month versus expectations for little or no growth, increasing speculation that the Bank of England may eventually need to tighten policy further.
- The ECB delivered another 25bp rate hike last Thursday, its second increase of 2026, as policymakers respond to renewed inflation pressure from energy prices. Officials have left the door open to further tightening, potentially as early as October.
- EUR/USD is back under pressure. The pair finished Friday around $1.1595 and has slipped towards $1.1550 this morning as higher US yields and Fed hike expectations support the dollar.
- Oil remains an important FX driver. Brent is trading above $100 per barrel amid escalating Middle East tensions and disruption risks to key shipping routes, adding another inflationary headache for the Fed, ECB and Bank of England.
- For GBP, Wednesday and Thursday are critical. UK inflation lands Wednesday morning before the Bank of England announces its latest interest-rate decision at midday on Thursday.
Market Recap…
FX markets spent last week balancing stronger inflation, soaring energy prices and shifting central-bank expectations. Sterling initially traded firmly around the $1.35–$1.3550 region before receiving an additional lift on Friday when UK GDP surprised positively, with the economy expanding 0.4% in July. GBP/USD was around $1.35 into the close.
The euro faced a more mixed reaction to Thursday’s 25bp ECB rate increase. Despite the hawkish move and indications that additional tightening remains possible, EUR/USD struggled to hold gains as attention quickly switched back to US rates.
Friday’s US CPI report proved decisive. Consumer prices increased 0.4% month-on-month in August, pushing markets towards a high probability of a Fed rate hike this week and lifting Treasury yields.
The dollar consequently strengthened into the weekend, although the broader dollar index still recorded a second consecutive weekly decline.
Our Thoughts for the Week Ahead
This could be one of September’s most significant weeks for FX. GBP/USD is likely to be particularly volatile, with UK employment figures on Tuesday, inflation on Wednesday, the Federal Reserve Wednesday evening and the Bank of England on Thursday. Our bias is that the USD retains near-term support while US yields remain elevated. A 25bp Fed hike is now heavily priced, meaning Wednesday’s reaction may depend less on the hike itself and more on Chair Kevin Warsh’s guidance and the updated rate projections. A hawkish message could place renewed pressure on both GBP/USD and EUR/USD.
For sterling, UK CPI may be the crucial domestic catalyst. Inflation was 2.9% in July, and another firm reading would reinforce expectations for future BoE tightening. The Bank is nevertheless expected to keep Bank Rate at 3.75% on Thursday, making the vote split and language around inflation especially important.
For the euro, last week’s ECB hike offers support, but EUR/USD may struggle materially above recent levels while US yields remain high. Oil and geopolitical headlines remain the major wildcard.
Economic Calendar
Monday
10:15AM EUR ECB Executive Board Member Isabel Schnabel Speech
2:00PM EUR ECB Executive Board Member Piero Cipollone Speech
4:15PM EUR ECB President Christine Lagarde Keynote Speech
4:35PM EUR ECB President Lagarde Panel Discussion
Tuesday
7:00AM GBP UK Labour Market Report / Unemployment / Average Earnings
10:05AM EUR German ZEW Economic Sentiment
1:30PM USD New York Empire State Manufacturing Index
Wednesday
7:00AM GBP UK CPI Inflation / Core CPI / PPI
10:00AM EUR Eurozone Industrial Production
1:30PM USD US Retail Sales
1:30PM USD US Import & Export Prices
7:00PM USD Federal Reserve Interest Rate Decision / FOMC Statement
7:30PM USD Federal Reserve Press Conference
Thursday
10:00AM EUR Eurozone Final CPI Inflation
12:00PM GBP Bank of England Interest Rate Decision & MPC Minutes
1:30PM USD US Initial Jobless Claims
1:30PM USD Philadelphia Fed Manufacturing Index
1:30PM USD US Housing Starts & Building Permits
Friday
7:00AM GBP UK Retail Sales
2:15PM USD US Industrial Production