Friday’s soft nonfarm payrolls report added further ammunition to the doves in the Federal Reserve, and rate markets continued pushing back their expectations of hikes in the US.
The dollar lost ground against all of its major peers, with the conspicuous exception of the yen. This retracement in the yen should be put into perspective, however, as the Japanese currency is still up massively over the last two weeks due to aggressive joint FX intervention between the US and Japan. Beyond currency markets, bond prices have stabilised and equity prices continue to hit records, as investors choose to ignore for now the lack of progress in talks between the US and Iran and stubbornly high oil prices.
All eyes are now on the US CPI report for July, out on Wednesday. US inflation has so far shown little sign of second round effects. This report is one of two remaining before the key September Fed meeting, so another mild print in line with economists’ expectations could help seal the decision for no change in rates at the next meeting. We will also pay attention to a slate of big Treasury bond auctions throughout the week. UK GDP data for the second quarter on Thursday will also be an important, albeit lagged, reading.
GBP
Gilt markets seem to have stabilised lately, and markets are taking their cue from the modestly positive tone in economic data out of the UK. For now, noises suggesting that Andy Burnham may take a relaxed view of the UK fiscal rules are being ignored, and sterling is joining in the generally good performance of British assets.
This week's quarterly GDP numbers are expected to show a slowdown from the strong pace of growth in the first quarter of the year, with the economy still buoyed by government spending, as private investment lags. This is not the best basis for future growth, but markets deem it good enough for the time being. Barring any major surprises, this could be a relatively quiet week for British news, as the steady stream of policy announcements has dried up since Burnham disappeared for his holiday.
EUR
In a generally light data week, national reports suggest the German economy is finally benefitting from increased government spending, as the large fiscal package from 2025 filters through. High frequency indicators out of the common bloc such as the business activity PMIs have rebounded, suggesting that economic momentum from the surprisingly strong second-quarter growth numbers is carrying into the third quarter.
Markets are pricing in an 80% chance of a second hike at the September ECB meeting, which is helping the euro continue its rally against the dollar. News of a deal to reopen the Strait of Hormuz could also be mildly bullish for the common currency as and when we get it, though any upside here could be limited given that a lot of good news already appears to be priced in by markets.
USD
Friday’s labour market report surprised to the downside, though other indicators continue to suggest little change in job market dynamics in the US, i.e. restrained job creation that is nevertheless sufficient to absorb the diminished supply of workers. We see little reason to change our views of the US economy. As for the Federal Reserve, recent labour and inflation data reinforce our view that the central bank will keep rates unchanged in September, which remains the base case according to futures pricing, albeit only just.
The next test of our view is the July inflation report on Wednesday - economists are expecting a modest drop in both the headline and core rates of inflation. We think that it would take an unlikely significant upside surprise to tip the balance of FOMC voters towards a hike at the September Fed meeting.
CNY
The yuan ended the week broadly flat against the dollar, even as the greenback softened following the weak US payrolls print. The main domestic focus was July trade data, with exports rising 23.9% YoY, a touch below June's pace but still reflecting strong external demand across ships, autos and tech, while imports grew 27.5% on continued strength in hi-tech categories. Inflation data for July disappointed, with headline CPI easing to 0.5% YoY from 1.0%, the slowest pace since January, as both food and fuel prices softened. Core inflation eased to 0.9%.
Overall, external demand remains the key support for growth this year, with soft inflation and incremental easing signalled at July's Politburo meeting keeping the door open to further stimulus later this year.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- FX Monthly - August 2026
- FX Update: 5 Things to Watch for Burnham’s Premiership
- Latin America FX Outlook - July 2026
