Currency Market Outlook Monday 1st September 2025

The euro opened the week firmer, recovering ground after last week’s political jitters in France. Initially, the prospect of Prime Minister François Bayrou losing a confidence vote on 8 September weighed heavily on the single currency. France’s €3.3 trillion debt pile, rising bond yields and widening sovereign spreads unsettled investors. However, in today’s first session the euro is drawing strength from a weaker US dollar, with EUR/USD trading near 1.1700.

In the broader currency market outlook, policymakers at the European Central Bank remain cautious. Olli Rehn, the Bank of Finland governor, has warned there is “no room for complacency,” reminding investors that downside risks to inflation remain. Cheaper energy, a stronger euro, and the lowest level of service inflation in more than three years all point to softer price pressures. ECB economists have also flagged that escalating trade tensions between Washington and Beijing could divert cheap Chinese goods into Europe. If realised, this would cut Eurozone inflation even further below target and could strengthen the case for additional easing.

Not all data has been soft. The August Eurozone PMI surprised to the upside at 51.1, marking the strongest reading since May 2024 and signalling broad-based growth in both services and manufacturing. Service-sector price pressures also picked up, hinting that inflation could prove sticky. This resilience means traders now see only a five per cent chance of an ECB rate cut in September, though the 11 September meeting and updated forecasts remain pivotal for the euro’s direction. Ahead of that, Tuesday’s flash inflation print for August will be closely watched. A softer reading would reinforce Rehn’s warnings on disinflation, while a stickier outcome could limit scope for additional cuts.

Bond markets add another layer of complexity. A global sell-off in long-dated sovereign debt has lifted yields across the G10, with German 30-year yields touching 15-year highs. France remains the focal point, with spreads over Germany widening sharply, but this comes against a broader backdrop of rising long-term borrowing costs that threaten to weigh on growth. For corporates buying EUR, the balance is finely poised: structural headwinds from politics and trade risks argue for weakness, but resilient activity and bond-driven rate dynamics are limiting immediate downside.

On the US side, the currency market is being shaped by growing expectations of a Federal Reserve rate cut in September. San Francisco Fed President Mary Daly has said policymakers are preparing to cut “soon,” while Governor Christopher Waller has left the door open to a larger move if labour market weakness persists. Although the Fed’s preferred inflation gauge, the core PCE index, rose to 2.9 per cent in July, markets see this as a temporary tariff-driven effect.

The bigger story is political. President Trump’s attempt to dismiss Fed Governor Lisa Cook marks the most direct challenge to central bank independence since the 1970s. While legal proceedings will drag on, the message to policymakers is clear: cut rates or face removal. This raises the risk that any easing move in September will be read less as a response to data and more as a capitulation to political pressure, a narrative that undermines USD credibility.

With the US observing a holiday today, attention quickly turns to Friday’s August labour market report. This is the pivotal event of the week: a weak payrolls print would validate September cut expectations and keep the dollar on the defensive, but a resilient outcome could flip sentiment and send USD sharply higher. For corporates buying USD, the current softness creates a tactical window to transact at favourable levels, but the risk of reversal is significant.

Sterling has underperformed within the G10, with GBP/EUR steady at 1.1540 and GBP/USD confined to the 1.34-1.35 range. Sentiment is being weighed down by UK fiscal concerns, particularly speculation over potential windfall taxes on banks. The gilt market is also flashing warning signs, with long-dated UK yields climbing faster than peers, reflecting unease over debt sustainability. Labour’s spending commitments and sticky inflation data have compounded those worries. All eyes this week are on Bank of England Deputy Governor Sarah Breeden, who speaks on Wednesday. A consistent dove through 2025, she has backed rate cuts as inflation cools. If she signals comfort with accelerating monetary easing, the pound could come under fresh pressure; if she instead highlights risks from wage growth or sticky inflation, sterling may find temporary support.

Today’s currency market outlook shows a mixed picture for corporates. The euro is buoyed by broad dollar weakness but remains vulnerable to French political uncertainty and ECB disinflation concerns. The US dollar is softening as markets price in a September Fed rate cut, leaving it exposed to incoming labour market data and political interference risks. Meanwhile, sterling remains stuck in a tight range with a mild downside bias, reflecting both domestic fiscal headwinds and dovish BoE commentary.

For corporates selling GBP and buying EUR or buying USD, this environment creates tactical windows of opportunity. Euro gains are capped by structural risks, the dollar is pressured by expectations of Fed easing, and sterling remains range-bound but fragile. With volatility likely to remain elevated, careful execution and close monitoring of data will be critical in managing currency exposure effectively.