Dollar Under Renewed Pressure as Fed Rate Cut Bets Rise

US Dollar (USD)

The US dollar has struggled to gain traction this week, as growing market conviction builds that the Federal Reserve will deliver an interest rate cut next month. Comments from New York Fed President John Williams, hinting that policy easing could be on the horizon, have only fuelled these expectations.

Adding to the pressure, political turbulence in Washington has unsettled investors. President Donald Trump has stepped up efforts to influence the central bank, pushing to remove Fed Governor Lisa Cook and replace her with a loyal ally. This intervention has sparked concerns over the Fed’s independence and dampened confidence in the greenback.

Even against the euro, the dollar lagged, despite Europe facing its own political strains. In France, Prime Minister Gabriel Attal faces a looming confidence vote that could bring down his government.

The dollar index held steady at 98.145 after two consecutive days of losses. Traders are now awaiting key economic data ahead of the Fed’s 16–17 September policy meeting, with Friday’s release of the PCE price index — the Fed’s preferred measure of inflation — in sharp focus. Next week’s US employment report will also be critical. Current market pricing points to an 89% probability of a quarter-point cut in September, with around 55 basis points of easing expected by year-end. Two-year US Treasury yields, which are highly sensitive to policy expectations, have fallen to their lowest levels since early May, piling further downward pressure on the dollar.

Pound Sterling (GBP)

Sterling had enjoyed steady gains through mid-August, buoyed by stronger-than-forecast UK data and sticky inflation, which prompted markets to anticipate further tightening from the Bank of England (BoE). However, momentum has since faded.

The risks for the pound are now building. Investors increasingly expect the BoE to adopt a softer stance in the autumn, while mounting fiscal concerns are once again in the spotlight. Long-dated UK government bond yields have surged, with the 30-year yield reaching 5.63% — its highest in almost three decades. This sharp move has intensified calls for Prime Minister Keir Starmer’s government to demonstrate greater fiscal discipline.

Yet, previous attempts at aggressive tax rises or spending cuts have shown the risks of choking off growth, leaving sterling’s outlook vulnerable if policymakers struggle to strike the right balance.

Euro (EUR)

The euro briefly pushed higher, breaking through 1.1660, but political uncertainty across the continent quickly capped the rally. In France, the government faces a make-or-break confidence vote, while in the Netherlands, Prime Minister Dick Schoof only narrowly survived a no-confidence motion after his coalition fractured over foreign policy. Campaigning is now underway for October’s snap election, highlighting the depth of political divisions in Dutch politics.

Despite these headwinds, the single currency managed to pare losses by the session’s close. Adding another layer of complexity, the European Union has agreed to scrap all tariffs on US industrial goods. The move, which came under pressure from President Trump, helped avert heavy duties on European car exports but has sparked criticism over the EU’s negotiating stance.

Bond markets are reflecting the political and trade jitters, with eurozone spreads widening. While not a direct indicator of credit risk, the trend signals investor unease. This could weigh on the euro in the short term, although analysts note that US monetary policy remains the dominant driver of the currency pair.

Market Outlook

All eyes remain on upcoming US economic data, particularly the PCE inflation print and next week’s non-farm payrolls, which will be pivotal in shaping expectations for the September Fed decision.

For the pound, developments in UK gilt markets and fiscal strategy will be central to its direction. In Europe, political instability in France and the Netherlands will continue to pressure sentiment. However, the euro’s path is likely to hinge more on the Fed’s next move than on domestic politics.

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