EUR / USD
The EUR/USD outlook appears cautiously bullish heading into September, driven by shifting monetary policy dynamics between the Federal Reserve and European Central Bank. Recent PCE data showing core inflation at 2.9% has reinforced expectations of a September Fed rate cut, with markets now pricing in approximately 90% probability.
While French political uncertainty has introduced some headwinds for the euro, policy convergence is expected as the Fed prepares to ease while the ECB remains on hold near 2%. The euro continues to benefit from relative yield support as Eurozone inflation gradually normalises, though growth remains subdued. Flash HICP data due September 2nd will be crucial for confirming the ECB's steady stance.
Despite near-term French political risks creating a discount in EUR/USD, we view this as temporary and maintain a rangebound forecast of around 1.1550-1.1700 over the coming weeks. The key catalyst ahead will be the September 5th, US jobs report, which could cement Fed easing expectations if it shows continued labour market softening.
USD / JPY
The Japanese economy shows signs of fragility amid complex monetary policy dynamics, with GDP growth remaining tepid through the first half of 2025. The Bank of Japan maintains one of the loosest monetary policies among developed markets with a short-term interest rate of 0.5%, significantly lower than other major economies. Recent wage growth trends have become a focal point for monetary policy, with data showing unprecedented increases of 5.3% in 2025 compared to just 10% growth over the previous three decades.
The yen's significant depreciation of 50% against the US dollar since 2022, currently trading near ¥147, reflects the BOJ's continued yield suppression strategy. Market attention is particularly focused on upcoming wage growth and household spending data, as these metrics could influence the BOJ's monetary policy decisions in Q4 2025. The central bank's cautious approach to policy normalisation, coupled with structural challenges including ageing demographics and high public debt levels exceeding 230% of GDP, continues to shape Japan's economic trajectory.
A potential shift in BOJ policy hinges on whether rising wages translate into sustained consumption growth, making upcoming economic indicators crucial for market sentiment. In the meantime, the pair is likely to remain stable, with US figures guiding the short-term momentum.
GBP / USD
GBP/USD continues to hold firmly as the Bank of England's August rate cut to 4% has created a narrowing interest rate differential with the Federal Reserve's 4.25-4.50% range, putting moderate downward pressure on sterling.
Consumer spending in the US remains resilient despite elevated inflation, with July PCE data showing core inflation at 2.9% and robust personal spending growth of 0.5%. The labour market dynamics will be crucial, with expectations for subdued August US payroll growth of 75,000 jobs potentially supporting the case for Fed easing.
Political uncertainty has emerged as President Trump's attempts to reshape Fed leadership raise concerns about central bank independence and monetary policy credibility. Market sentiment suggests the Fed will likely cut rates in September, with probability estimates around 89%, though the pace and extent of easing remain uncertain. The combination of BoE dovishness, Fed policy uncertainty, and trade tensions creates a challenging environment for sterling in the near term, with moderate selling pressures expected in the coming weeks.
