FX Market Outlook: Dollar Weakness, Sterling Gains & Euro Strength Amid Shifting Rate Expectations.

• USD – Has weakened following a poor US jobs report, with markets now less confident of a September Fed rate hike.
• EUR – Remains relatively strong, with EUR/USD reaching its highest level since mid-June as dollar weakness supports the euro.
• GBP – Is holding most of its recent gains, with sterling reaching a three-week high against the dollar following Friday’s weak US payrolls data.

USD:

The dollar has come under pressure following Friday’s weak payrolls report, which showed a 23K decline and was accompanied by over 100K in downward revisions to previous months. The weaker labour market has triggered a dovish shift in rate expectations, with markets now leaning towards the Federal Reserve holding rates at its September meeting. One further rate move is still priced in for this year, but expectations have become more cautious.

Attention now turns to this week’s US data, with Wednesday’s CPI inflation figure the key release. Inflation is expected to ease from 3.5% to 3.4%. PPI inflation follows on Thursday, before retail sales and consumer sentiment on Friday. These figures could provide further clues on the Fed’s next move and the direction of the dollar.

EUR:

The euro has strengthened against the dollar, with EURUSD reaching its highest level since mid-June on Friday before consolidating slightly lower. The move has been supported largely by renewed dollar weakness following the disappointing US jobs data.

The eurozone calendar is relatively quiet this week, meaning most of the market’s attention remains on US data and Federal Reserve expectations. Eurozone investor confidence is due today, while a second release of Q2 GDP is expected later in the week. With limited domestic catalysts, EUR performance is likely to remain closely linked to movements in the dollar.

GBP:

Sterling is holding on to most of its post-payrolls gains, reaching a three-week high against the dollar on Friday following the weak US jobs report. The move has been driven primarily by dollar weakness rather than a significant change in the UK outlook.

The key UK release this week is Thursday’s Q2 GDP figure, which is expected to show growth of 0.4% quarter-on-quarter. Until then, markets will remain focused on US inflation data and what it means for Federal Reserve rate expectations. A strong UK GDP figure could provide further support for sterling, while weaker data may limit its recent gains.