Dollar slips as Fed cut bets rise for September

Daily Currency Update

The US dollar is unlikely to maintain recent strength as markets increasingly price in a Federal Reserve rate cut in September, with odds now at 89%. Supporting this expectation, San Francisco Fed President Mary Daly, indicated policymakers are ready to lower rates soon, despite July’s rise in inflation. That increase is largely attributed to lingering effects from Trump-era tariffs, which Daly believes will prove transitory. A US Federal Court has since ruled those global tariffs illegal, although they remain in place pending appeal. With a US bank holiday today, data flow will be limited early in the week, but attention will shift to labour market figures including JOLTS, ADP non-farm payrolls, and Friday’s key Non-Farm Payrolls report.

In the UK, Sterling is benefiting from both last month’s cautious Bank of England rate cut and growing expectations of a Fed easing. Domestically, attention is turning to fiscal policy after the UK signed a £10bn defence deal with Norway - an important move for NATO amid heightened Russian submarine activity. Markets will also be watching for a potential budget date announcement from Chancellor Rachel Reeves and Prime Minister Starmer this week. Reeves faces tight fiscal constraints, exacerbated by a failed attempt to recoup £1.5bn through winter fuel allowance changes, which only saved £220m. UK Retail Sales data on Friday will provide insight into the strength of domestic demand.