Pound supported by rate divergence rhetoric

Key Movers

The dollar has steadied after hitting a seven-week low, as markets weigh soft labour data against persistent inflation concerns. August Non-farm payrolls disappointed at 22,000 jobs, and unemployment rose to 4.3%, reinforcing expectations of a 25 bp Fed cut next week, with futures pricing in a 93% chance. However, Fed officials remain cautious, citing elevated inflation. Upcoming PPI and CPI data will be key in the US. Geopolitical tensions, including a Russian drone breach of NATO airspace and Trump’s tariff push, add safe-haven support. Dollar direction hinges on CPI with strong data potentially lifting the USD, while weak prints bolstering rate-cut expectations.

The euro is flat ahead of Thursday’s ECB meeting, with rates expected to remain unchanged. Focus will be on Lagarde’s press conference for clues on future policy. Any dovish tone could pressure the euro. Political instability in France, following the ousting of PM Bayrou, raises fiscal concerns, while a Russian drone breach into Polish airspace adds geopolitical risk. These factors weigh on sentiment and tilt EUR/USD lower. The ECB’s guidance will be key, but broader uncertainty and safe-haven flows into USD and gold could keep the euro under pressure.