Yet neither the Jackson Hole symposium nor the payrolls data have brought real clarity, with a hike still very much a coin-toss heading into Friday's CPI print. The Fed's announcement will be just one of a slew of critical central bank decisions this month, all landing against the backdrop of an increasingly nervous bond market, where sovereign yields keep hitting multi-decade highs and investors' patience for policymakers who miss their inflation targets year after year is wearing thin.
The carousel of central bank meetings kicks off this week with the ECB on Thursday, where there is little suspense about the outcome: a 25 basis point hike is essentially a done deal. Markets will instead focus on President Lagarde's guidance on further tightening, along with her take on the surge in long-term yields worldwide. The other key event this week is the release of the August US inflation report - the last major data point before the Fed's own decision the following week. We still favour no change, but the central bank's final call will hinge heavily on this reading.
GBP
Sterling underperformed most of its G10 peers in the last couple of weeks of summer, though the moves were relatively modest given a lack of major market moving news in Britain. The general sell off in sovereign bonds is also affecting gilts, and memories of the Liz Truss debacle in 2022 are still fresh - indeed, the 30-year yield has surged well past those levels and last week’s broke to 28-year highs. As the only central bank that appears to have more-or-less ruled out a hike in September, the Bank of England's dovishness is also not helping the pound. Chief economist Pill struck a hawkish note last week, though we do not think that his views are shared by the majority of the rate-setting committee.
One of the few positive factors remaining for sterling is the modestly positive tone of UK economic reports. Activity data - including the second-quarter GDP figures - continues to largely surprise to the upside, despite the ongoing cooling in labour market conditions and the jump in borrowing costs. Key events to monitor this week include Friday’s July GDP report and Tuesday’s Treasury Select Committee testimonies from Governor Bailey.
EUR
Growth momentum indicators like the PMIs continue to paint a picture of economic resilience in the euro area that, together with core inflation still running above target and the Iran war dragging on without a clear ending in sight, gives the ECB sufficient justification to keep raising rates. A 25 basis point hike from the Governing Council this week is fully priced in by swap markets, so anything less would be not just a major shock but a big disappointment for investors.
The more important question for currency markets is whether there is any pushback against expectations for a 3% terminal rate in 2027. We think this pricing is excessive, particularly as any further hikes beyond this month's meeting would push the terminal rate into restrictive territory - a move too far, in our view, given the growth risks and the fact that the inflation problem remains almost entirely due to supply-side issues. The common currency, however, continues to trade mostly off the news in the US for now, so we expect limited fallout from the meeting’s headlines.
USD
Last week's very strong labour market report showed robust job creation and a rising participation rate, pushing the alleged AI jobs apocalypse further into the future. A net 162k jobs were added in August, not only well above the median estimate but comfortably above even the top-end projections. The sharp pick-up in hiring suggests the labour market isn't just refusing to cool - it's actively gathering pace, and there is certainly nothing in the data that would, in isolation, dissuade Fed officials from tightening policy further.
A healthy labour market gives further ammunition to the hawks on the Federal Reserve. However, relentless political pressure from the Trump administration to keep rates low - including another extraordinary outburst on Friday threatening to halt trade with countries running deficits with the US unless the Fed lowers rates - suggests to us that the FOMC will vote again to hold rates steady. Warsh's equivocations only add to that view, barring an unlikely nasty surprise in this week's inflation report. This is currently our main point of disagreement with how markets are pricing monetary policy worldwide.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- G3 FX Outlook - September 2026
- Africa FX Outlook - August 2026
