The below key drivers are likely to impact investor risk sentiment and FX markets in August:
- Oil prices and the conflict between the United States and Iran are keeping inflation concerns alive, supporting currencies like the Canadian dollar while adding pressure on energy importers like Japan.
- Central bank decisions and interest rate expectations remain in focus, with US inflation data and a gathering of central bankers in Jackson Hole likely to set the tone.
- A weaker US dollar and the joint move by Japan and the United States to buy yen are impacting Asia-Pacific currencies, though wide interest rate gaps still cap gains.
EUR | Euro
The euro has climbed above US$1.15 on the back of a softer US dollar, with an expected European Central Bank rate rise in September offering further support through a quiet August.
Like many currencies, the euro has benefitted from the broadly weaker US dollar seen in late July and early August. EUR/USD bottomed out at around 1.1325 on July 24th before pushing higher as August began. The pair now has a foothold above 1.15 and could climb further this month, given new Federal Reserve Chairman Kevin Warsh’s apparent reluctance to raise interest rates for now.
Markets are anticipating the European Central Bank to lift rates at its September 10th policy decision, which analysts are widely tipping to be its only increase for the rest of the year. Eurozone inflation ticked up to 2.9% year-on-year in data released July 31st and could pass 3% in coming months, driven largely by rising energy prices linked to the US–Iran conflict. With Donald Trump seeking an exit from hostilities ahead of the mid-term elections, many hope the latest ceasefire holds.
August is traditionally quiet in the eurozone, with much of the bloc on holiday, so little data is due beyond the Purchasing Managers’ Index (PMI) business surveys on August 21st. Last month’s surveys showed early signs of recovery in Germany’s manufacturing sector.
Expected ranges:
- EUR-USD 1.1440–1.1700
- EUR-GBP 0.8490–0.8650
GBP | Sterling
Sterling has rallied to around US$1.35 on a softer US dollar, but nerves over the UK’s fiscal position ahead of the Autumn Budget could cap potential gains in September.
Andy Burnham took office in July as the UK’s seventh Prime Minister in 10 years, succeeding Keir Starmer. His choice of Chancellor of the Exchequer, John Burnham, was unexpected but generally well received by markets. Burnham has promised to balance the UK’s books, though nerves are likely ahead of the Autumn Budget, so the pound’s recent rally could be short-lived.
GBP/USD is back around 1.35 after dipping below 1.33 in late July, helped by a broadly weaker US dollar. Support also came from the Bank of England’s July 30th decision, where three members of the Monetary Policy Committee voted for a 0.25% rate rise. The majority voted to hold and wait to see what inflationary pressure develops from the recent jump in oil prices, as the United States resumed hostilities with Iran.
If US inflation comes in lower than expected this month, GBP/USD could test the May high of 1.3650. When Parliament returns in early September, jitters over the UK’s fiscal position may return, as they did at the same time last year. With no Bank of England decision until September 17th, inflation data, business surveys and the Middle East are likely to continue driving the pound for the rest of the month.
Expected ranges:
- GBP – USD 1.3270–1.3655
- GBP – EUR 1.1560–1.1775
USD | United States dollar
The US dollar eased in July as softer inflation data offset support from higher oil prices, leaving economic releases and the Jackson Hole symposium as key drivers in August.
The US dollar lost momentum in July after its strong June rally. The US Dollar Index (DXY), which measures the greenback against a basket of major currencies, fell from 101.22 at the start of the month to 99.80 by month-end, a decline of around 1.4%, as markets weighed geopolitical risk against signs of easing inflation. While higher oil prices and renewed Middle East tensions typically support the US dollar, softer-than-expected inflation data dampened expectations of further Federal Reserve rate rises and capped its upside.
The Federal Reserve left rates unchanged at 3.5%–3.75% last month, though three members voted for a rise, underlining concerns that inflation remains above target. Markets are also adapting to new Fed Chair Kevin Warsh, whose preference for a data-led approach and less guidance on future moves has added volatility. Last week’s employment report showed payrolls unexpectedly falling by 23,000 against expectations of an 85,000 increase, raising doubts over how long the Fed can maintain higher rates.
August is set to be an important month, with inflation and jobs data, the Middle East and the Jackson Hole symposium all in focus.
Expected range:
DXY 99.250–100.050
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