USD: Dollar faces a defining September
The US dollar ended a turbulent August with only a modest loss. The DXY closed at 99.428, down 0.47% over the month, despite trading between 98.800 and 100.014. Treasury actions weighed on the currency by raising fresh questions over US policy credibility. However, Kevin Warsh’s hawkish Jackson Hole speech helped the dollar recover into month-end.
The Treasury’s expanded bond buybacks and possible use of its cash balance carried more value as policy signals than direct FX drivers. Markets saw a risk that these steps could evolve into broader efforts to restrain long-term yields. Such a shift could require closer coordination between the Treasury and the Federal Reserve. In turn, that would deepen concerns over inflation, central bank independence and the dollar’s long-term appeal.
Warsh pushed back against that narrative by reaffirming the Fed’s commitment to its 2% inflation goal. His message drove yields higher, with the two-year ending August at 4.344% and the 10-year at 4.752%. Even so, the dollar has not fully followed the rise in US yields, as investors remain focused on policy credibility rather than rate differentials alone. With policy premium under control of Dollar price discovery, further weakness may require clearer evidence of financial repression or a sharp deterioration in US data.
The renewed conflict around the Strait of Hormuz adds another layer to the outlook. US strikes and Iran’s response lifted oil prices, disrupted shipping and pushed freight costs higher. These pressures could feed into inflation and reinforce Warsh’s case for tighter policy. They could also support the dollar through demand for safety, although a larger energy shock would raise the risk of weaker global growth.
September now turns to the US data and the Fed’s September 16 decision. ISM, JOLTS, jobless claims and the August payrolls report will test whether Warsh’s tougher stance can survive the next data cycle. A firm inflation and employment backdrop could lift DXY above 100 and open a move toward 100.50 to 101.00. Softer data or an easing of tensions in Hormuz could instead send the index back toward 98.80, leaving August’s narrow close as a pause before a clearer break.
EUR: EUR/USD holds its line
After Friday’s sell-off, triggered by Fed Chair Kevin Warsh’s Jackson Hole remarks, EUR/USD found solid support near 1.1570. The pair still maintains a broadly bullish structure from the late June lows around 1.1320/30.
Since then, the Fed’s hawkish narrative has lost some shine. Despite Warsh’s attempt to rebuild credibility among skeptical investors, yesterday’s price action suggested broader concerns around the US fiscal backdrop, the US Treasury’s interventionist approach, and rising long-end yields may be weighing more heavily on the dollar than a hawkish Fed can support.
Recent comments from Treasury Secretary Bessent at the G20 finance ministers’ gathering may have revived some of those concerns. It’s also telling that while renewed tensions in the Middle East have pushed oil and yields across G10 peers higher, the euro still delivered a strong session yesterday. That suggests markets are viewing higher yields less as a straightforward hawkish repricing and more as a reflection of fiscal concerns, blunting the dollar’s usual rate advantage.
Investors may now need that Fed hike to actually materialise before becoming more convinced, allowing yield support for the dollar to find its strength again.
Until then, EUR/USD sellers may be less inclined to engage with much conviction, as the pair remains supported around current levels. The Fed policy meeting on 16 September will be the key test.
Today brings the eurozone’s aggregate August CPI reading, following a run of hotter-than-expected national releases, with yesterday’s German print the latest example. Headline CPI is expected to rise to 3.3% from 2.9%. That should only reinforce the case for an ECB rate hike this month. Markets are already aware of that, however, so don’t expect a meaningful upside reaction in the euro.
GBP: Sterling defies seasonality
Sterling finished August modestly higher against the dollar, but the journey was more notable than the destination. GBP/USD briefly climbed above 1.36 to a six-month high before surrendering much of the move late in the month, as hawkishly interpreted comments from Fed Chair Kevin Warsh at Jackson Hole helped revive the dollar. Even so, cable still managed to defy its usually weak August seasonality and end the month in positive territory.
The move was driven primarily by the USD leg of the equation rather than a material improvement in the UK outlook. Softer US labour market and inflation data earlier in the month weighed on the dollar, while concerns around US fiscal credibility and Treasury financing plans also supported GBP/USD. Overall, the pair still looks slightly elevated compared to what rate differentials alone suggest, which we attribute largely to a rise in the US risk premium.
Against the euro, the story was less bullish. GBP/EUR largely traded sideways in the 1.16-1.17 range, having already retraced sharply from July’s one-year highs above 1.18. Narrowing UK-eurozone yield differentials limited further upside.
Overall, August reinforced a familiar theme: sterling remained more sensitive to global macro developments than domestic fundamentals, with dollar moves, risk sentiment and relative rate expectations proving the dominant drivers.
Looking ahead, however, the outlook becomes more complicated. UK economic data has a tendency to surprise lower heading into Q4, but sterling has a tendency outperform. Scrutiny of Prime Minister Burnham’s fiscal plans is likely to intensify ahead of the Autumn Budget – this is certainly one force that could test sterling’s seasonal resilience.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
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Calendar: August 31 – September 4
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
