FX Weekly Update: Rate Expectations Move the Market

Summer markets may seem calm, but there’s tension building beneath the surface. Global bond yields are quietly climbing, central banks are staying deliberately vague, and FX traders are watching for a spark. The U.S. dollar is softening, the pound is still climbing, and expectations around interest rate cuts are shifting in real time.

This week could shake things loose. Three major catalysts are on deck: UK inflation on Wednesday, global PMIs on Thursday, and the start of the Jackson Hole Symposium on Thursday, culminating in Powell’s Friday speech. What follows may be a reset in market direction.

The dollar ended last week on the back foot despite stronger U.S. PPI and jobless claims data. CPI came in line with expectations, but sticky inflation expectations and persistent price pressures are challenging the market’s dovish stance.

Currently, markets price an 83% probability of a Fed rate cut in September, but Powell’s speech on Friday (Aug 23) could challenge that. With inflation still above target and signs of labour market strain, the Fed is navigating a tightrope. If Powell signals less urgency to ease, the dollar could stage a sharp rebound.

Key risk: A hawkish tone at Jackson Hole could break the dollar's downward trend.

Sterling continues to show resilience, even as UK growth remains tepid. The 0.3% Q2 GDP surprise gave the pound a lift, but beneath the surface, consumer and business investment was soft. What’s really keeping Sterling supported is the interest rate divergence between the Bank of England and its peers.

The BoE’s recent hawkish 5–4 vote to cut rates signalled that further easing is far from guaranteed. Services and wage inflation remain stubbornly high, and core CPI hasn’t dropped below 3% since 2021. All eyes are now on Wednesday’s CPI print (Aug 21) a hot number could cement expectations for no more cuts this year.

However, Deutsche Bank points out that reactions to inflation surprises have become harder to predict, likely due to the UK’s growing fiscal pressures and rising gilt yields.

Bottom line: Sterling’s strength is being propped up by reduced cut expectations, not robust growth. A weak inflation print or soft retail data could reverse that quickly.

EUR: Stable for Now, but Risks Loom
The euro has held its ground despite geopolitical noise, including Trump’s meetings with Putin and Zelensky. What really matters this week is the data. Eurozone CPI (Wednesday) and PMIs (Thursday) will determine whether markets resume pricing in further ECB easing.

A weak CPI could spark fresh EUR selling, especially if UK data exceeds expectations. Christine Lagarde’s appearance at Jackson Hole will also be closely watched for subtle guidance on the ECB’s next move.

Sterling has broken resistance near 1.3540, heading for 1.3590. If inflation overshoots this week, momentum could drive GBP/USD to 1.3790. But the path isn’t one-way.

If UK CPI disappoints or retail sales (Friday) come in weak, BoE cut expectations could return - just as Powell delivers his verdict on the Fed’s next steps.

Read our GBP/USD outlook for more on how UK inflation could shape GBP/USD near term.

Bond Yields, Peace Talks, and Policy Tension

Markets often ignore geopolitics, until they don’t. A peace deal between Russia and Ukraine, especially one seen as favourable to Moscow, could reshape energy markets and risk sentiment across Europe.

Meanwhile, the global bond sell-off is becoming too loud to ignore. Rising long-end yields in the UK and Eurozone reflect both inflation risks and fiscal worries. For FX, this shift is crucial: rate differentials remain one of the strongest drivers in the space.

Key Events (Week of Aug 19–23)

Conclusion: Calm Before the Shift?

FX market feels calm, but this may be the eye of the storm. As traders wait for clarity on inflation and central bank direction, we may see volatility surge by the end of the week.

Expect positioning to shift fast. This could be the week that summer calm turns to autumn conviction.