Shifting Drivers: US Fed Politics, UK Caution, and Europe’s Fragility

US Dollar (USD)

The US dollar remains firmly driven by expectations surrounding Federal Reserve policy and growing debate over the central bank’s independence. These factors, together with wider economic data, have been the main catalysts of volatility.

Earlier this week, Jerome Powell’s remarks at Jackson Hole – suggesting a potentially higher long-term neutral rate – pushed the greenback higher by around 0.7%. However, half of those gains quickly evaporated after former President Donald Trump threatened to dismiss Fed Governor Lisa Cook.

August’s market trends highlight a notable shift: fears of tariffs have been replaced by concerns over political interference in the Fed. Tariff uncertainty has already left a mark on the economy, with weaker labour market data standing out. Yet the bigger worry now is whether politics could undermine central bank credibility – a risk that might not only hit the dollar but also weigh on US assets, particularly long-dated Treasuries.

British Pound (GBP)

Sterling has endured a difficult year, with GBP/EUR down over 4% year-to-date, leaving the currency close to the lower end of its seasonal range. This underperformance is striking, given the UK’s yield advantage. Capital flows have instead favoured the eurozone, fuelled by Germany’s fiscal expansion, which has proven more influential than relative interest rate differentials.

Since late 2024, rate and growth spreads between the UK and the euro area have remained largely stable. Yet the euro has continued to attract flows that might otherwise have supported the pound. Recently, political tensions in France have offered some respite for sterling, nudging GBP/EUR back towards €1.16. Technical indicators point to a possible break above this summer’s trading band, though history shows such moves often reverse without strong fundamental drivers. Seasonality also argues for caution, with the pound traditionally underperforming in Q3.

Despite long-dated UK gilts offering the highest yields among major government bonds, the pound’s muted performance signals persistent concerns around Britain’s fiscal outlook and growth prospects. Elevated borrowing costs, a legacy of the Truss mini-budget turmoil, remain entrenched. With fiscal credibility still in question, investors continue to demand a risk premium to hold UK assets.

Euro (EUR)

The euro has traded erratically, influenced by both US and European developments. While concerns over Federal Reserve independence briefly lifted EUR/USD by around 0.33%, the single currency faces renewed pressure from political risks at home.

France is heading towards a crucial confidence vote on 8 September 2025, with the risk of government collapse weighing heavily on investor sentiment. One-month EUR/USD volatility has already spiked relative to longer maturities, reflecting rising uncertainty.

At a time when EU unity is fragile – most recently tested by a poorly managed trade deal – political divisions leave the euro more vulnerable. Germany’s record infrastructure and defence spending has provided structural support by boosting growth expectations, but this positive momentum now collides with political fragility across the bloc.

Outlook

The months ahead are loaded with event risk across major currencies.

For the dollar, the spotlight will stay on the Fed’s independence and whether political pressures undermine policy credibility.
For the pound, the challenge remains balancing high yields with weak growth and persistent fiscal doubts.
For the euro, France’s looming political test will be decisive – determining whether German fiscal support can offset instability elsewhere in the bloc.

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