Market Sentiment Brightens as Late Summer Progresses

USD

Optimism has returned to US markets as late summer unfolds, driven by easing trade policy tensions and growing confidence in upcoming Federal Reserve rate cuts – factors encouraging greater risk appetite. The US dollar has faced downward pressure amid rising expectations of a more accommodative monetary policy, especially given signs of a cooling labour market. These developments make a September rate cut, followed by at least one additional cut this year, appear increasingly likely. So far this month, the dollar index has declined by nearly 2%, reversing much of July’s gains.

President Trump’s appointment of Stephen Miran as a temporary Fed governor has further fuelled expectations of a dovish tilt. Miran is known for advocating a “Mar-a-Lago Accord” aimed at weakening the dollar to boost exports. Although his influence is limited to a few meetings unless reappointed, his stance aligns closely with softer monetary policy proponents. Meanwhile, the anticipated appointment of Christopher Waller as the next Fed Chair offers reassurance to investors seeking stability. However, Miran’s presence reinforces the view that political forces favour a weaker dollar, which may maintain downward pressure on the currency even if economic data improves.

Market focus now shifts to forthcoming US inflation figures, which will be pivotal in shaping expectations for Federal Reserve actions. Given recent administration scepticism regarding official data accuracy, any surprises could trigger sharp market reactions. With two inflation reports and one employment release due before the September Fed meeting, all data points will be closely analysed.

GBP

Sterling received modest support following the Bank of England’s anticipated rate cut last week, despite the central bank maintaining a notably hawkish tone. GBP/EUR has climbed above €1.15 once again, while GBP/USD edges towards $1.35 from an early-month low of $1.3142 – with gains largely reliant on ongoing US dollar weakness.

The pound’s recent resilience owes much to a more positive global risk sentiment, which tends to favour higher-risk currencies like GBP. The BoE’s latest projections indicate inflation will reach 4% in September, limiting the scope for further easing this year. However, with economic growth slowing and inflation remaining elevated, the risk of stagflation is becoming more apparent. This challenging backdrop is compounded by fiscal pressures, posing additional structural hurdles for sterling.

UK payroll figures expected this week are likely to confirm employment declines over much of the past nine months, though redundancies have remained steady and hiring surveys show little change. This mixed labour market data complicates the Bank of England’s policy direction and clouds the pound’s prospects for sustained strength.

The UK awaits second quarter GDP figures on Thursday, with forecasts pointing to a significant slowdown compared to the earlier robust growth. Should the data confirm a marked deceleration, the pound may come under pressure as markets anticipate further interest rate cuts to support the economy. Typically, a weaker growth outlook reduces a currency’s appeal by signalling lower investment returns and potential monetary loosening. Conversely, a milder slowdown than expected could bolster sterling, as traders temper expectations for near-term easing.

EUR

The euro has enjoyed a solid recovery throughout August, gaining more than 2% against the US dollar and reversing much of the decline seen in July. While a push towards $1.20 had been anticipated later in the year, current optimism suggests this target could be reached sooner. Contributing factors include lower energy prices – boosted by hopes of progress in Russia-Ukraine talks – and expectations of faster US rate cuts, which would narrow the interest rate differential between the US and Eurozone.

Although recent economic data from the Eurozone has been disappointing, sentiment indicators have improved. Germany’s ZEW Economic Sentiment Index has risen sharply in 2025, signalling renewed confidence in manufacturing and fiscal stimulus measures. Historically, this index correlates strongly with EUR/USD movements, making its recent rebound especially noteworthy.

Geopolitical developments also influence the euro’s performance. President Trump’s upcoming meeting with President Putin to discuss Ukraine is not expected to deliver major breakthroughs, but earlier geopolitical risk premiums on oil have dissipated. Attention has shifted away from tensions involving Iran and the Houthis towards concerns over weaker global demand. For Europe, falling energy costs provide a boost to trade terms, and with political and economic tailwinds aligning, the euro may continue to strengthen.

Looking Ahead

The coming weeks will be critical as US inflation and employment data set the tone for the Fed’s next decisions, the Bank of England navigates the tension between persistent inflation and slowing growth, and Eurozone sentiment shows signs of further improvement despite weak current data. Currency movements will depend not only on economic fundamentals but also on political narratives and global appetite for risk.

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