Global FX Markets: Resilience Tested Across Major Currencies

US Dollar (USD)

The US dollar index is on course to record its seventh consecutive monthly decline in 2025, slipping by more than 2% against a basket of major peers and weakening versus almost nine out of ten global currencies. Month-end flows are muddying short-term signals, while anticipation of the August payrolls report is keeping investors on the sidelines. Yet the broader narrative is structural rather than cyclical.

Tariffs are weighing heavily on household and corporate demand, denting GDP growth. Meanwhile, tighter immigration rules are restricting labour supply. This has the dual effect of driving up wages while reducing potential output, slowing economic momentum without alleviating inflationary pressures. In such an environment, real interest rates typically drift lower.

Bond markets are mirroring this pressure. Short-dated yields are edging down on expectations of rate cuts, while long-dated yields are rising amid fiscal concerns and persistent inflation risks. This steepening rarely supports the dollar, signalling weaker economic performance and eroding policy credibility. Political risks add to the strain, with Donald Trump’s ongoing attacks on the Federal Reserve’s independence undermining investor confidence.

Even revised GDP data brought little reassurance. Although second-quarter growth was revised higher to 3.3%, much of the improvement stemmed from a 30% collapse in imports, artificially flattering the figure. Stripping away trade distortions, core domestic demand rose just 1.9%, highlighting a slowdown. Structural headwinds remain: weaker demand, constrained supply, and pressure on institutions. The PCE inflation release later today could provide only fleeting relief if the data proves stickier than markets expect.

British Pound (GBP)

Sterling has staged a modest recovery, buoyed by stronger UK data and speculation the Bank of England could deliver a hawkish signal. After sliding nearly 4% in July, GBP/USD clawed back over 2% in August, stabilising in the $1.34–$1.36 range. The rebound suggests fading pessimism, though it is too early to call a lasting trend. For now, sterling remains the clearest vehicle for expressing short-term optimism against the dollar, while GBP/EUR also has room to advance given heightened eurozone political risks.

Despite this improved tone, fiscal challenges linked to the forthcoming autumn budget continue to cloud the pound’s medium-term outlook. Yet business sentiment has turned upbeat. Lloyds reported confidence at a near decade high, with the majority of firms planning to expand hiring. Notably, over 80% said the recent payroll tax hike and higher minimum wage would not deter recruitment.

Hiring intentions have now risen for four consecutive months, while around a quarter of companies are offering pay increases of roughly 4% – comfortably above inflation. This indicates businesses are passing on higher labour costs to consumers rather than cutting staff. These findings align with PMI data, which show the fastest pace of private sector growth in a year. The numbers strengthen Chancellor Reeves’ defence of Labour’s first budget, but they complicate the BoE’s job. Resilient demand and firm wage growth could delay the timeline for rate cuts.

Euro (EUR)

The euro is under pressure as France faces fresh political turmoil. Prime Minister François Bayrou is widely expected to lose a confidence vote in the National Assembly on 8 September, stalling debt-reduction efforts as President Macron reshuffles his government. The uncertainty has rattled investors: sterling has climbed to €1.16, testing resistance, while French equities have sold off and local bond yields have risen faster than those in other eurozone states.

Analysts stress this is not the onset of a eurozone-style crisis reminiscent of the early 2010s, but the instability is unsettling. For now, EUR/USD is holding between 1.16 and 1.17, with moves still largely driven by US data. Yesterday, the euro found support from encouraging ECB minutes and better-than-expected economic releases. Confidence surveys point to cautious optimism for third-quarter growth, with conditions appearing firmer than earlier in the year.

ECB policymakers remain cautious on further cuts, though risks of slower growth and disinflation linger. Markets currently price in only limited easing through mid-2026. However, political instability in France and the Netherlands could add downward pressure if coupled with external shocks. Softer-than-expected inflation readings across the bloc are adding to the risks, while a strong US PCE print could push EUR/USD through the key 1.16 support level.

Outlook for September

September’s drivers are firmly clustered around policy and politics. For the dollar, the PCE release and payrolls report will set expectations ahead of the FOMC meeting, but structural headwinds persist. For sterling, domestic momentum and the autumn budget will shape sentiment, with the Bank of England balancing growth against inflation. For the euro, France’s political drama looms large, with bond markets already flashing warning signals.

In short, the world’s three most traded currencies face a challenging month ahead, where economic fundamentals and political risks collide to test resilience across global FX markets.

For all you Global payments & currency conversion solutions go to Monfor