FX Market Update: ECB Rates, US Inflation and What’s Next for GBP, EUR & USD

Key Highlight

• JPY: The yen has continued to strengthen, with USD/JPY falling to 154.80, its strongest level since February. Markets are increasingly expecting the Bank of Japan to raise interest rates at its 18 September meeting, while speculation around increased yen allocation by Japan’s pension fund is also supporting the currency.

•  USD: The Federal Reserve enters its pre meeting blackout this week, meaning policymakers will not be able to influence markets through public comments ahead of the 16 September decision. As a result, incoming economic data will take on greater importance.

•  EUR: Thursday’s ECB meeting is the first major event of the week. A rate hike is already fully priced into markets, so attention will focus on whether policymakers indicate that further increases could follow.

•  US inflation: Friday’s US inflation figures are likely to be the most important data release for the dollar ahead of the Fed meeting. A stronger or weaker reading could significantly alter expectations for September.

•  GBP: Sterling remains relatively stable but looks technically stretched. UK gilt yields are edging higher as rising energy prices increase inflation concerns and keep expectations of further Bank of England tightening alive.

Market Recap

US employment data provided a significant upside surprise on Friday, with payrolls increasing by 162,000, compared with expectations of around 55,000. Despite the strong result initially supporting the dollar, those gains faded as the session progressed. Markets are currently pricing a little over a 50% probability of a Fed rate hike on 16 September.

The yen has been the standout performer, extending its recent rally despite the stronger US employment figures. This suggests that expectations surrounding Japanese monetary policy are becoming an increasingly important driver of the currency.

Energy markets have also moved higher following renewed tensions between the US and Iran. Higher oil and gas prices are adding to concerns that inflation could remain persistent, potentially influencing central bank decisions across the major economies.

Market Overview

Euro vs Dollar

Near term: 50% conviction, broadly sideways with a modest upside bias.

The ECB’s expected rate increase on Thursday is already reflected in the euro’s valuation. The key question for markets will therefore be what policymakers say about the path beyond September. A suggestion that additional tightening remains possible could provide further support for the euro, while a more cautious message could limit gains.

The outlook for the dollar will also depend heavily on Friday’s US inflation figures. Fed Governor Waller has linked his policy position to the incoming inflation data, making the release particularly important for expectations ahead of next week’s meeting.

Medium term: 40% conviction, cautiously higher but with limited upside.

Deutsche Bank expects another ECB rate increase to 2.75% in December, although the wider market consensus currently expects the ECB to pause following this week’s decision. With some forecasts still below current EUR/USD levels, a sustained euro rally may prove difficult without a clear shift towards further ECB tightening.

What this means for businesses: For a €250,000 transaction, a move towards resistance could reduce the cost for dollar buyers by approximately $1,500. Conversely, a move towards support could increase the cost by approximately $1,675.

Pound vs Dollar

Near term: 50% conviction, broadly sideways with modest downside risk.

The stronger than expected US payrolls figures have brought Fed tightening expectations back into focus. Sterling’s recent technical sell signal also suggests that any short term recovery could attract renewed selling pressure.

At the same time, the Bank of England continues to face inflationary pressure, particularly from higher energy prices. However, the interest rate advantage between the UK and US remains relatively narrow.

Medium term: 50% conviction, cautiously lower.

The Federal Reserve’s policy path remains one of the main influences on GBP/USD. A September rate increase accompanied by a hawkish message could provide further support for the dollar.

Investor positioning is another factor to watch. Relatively low currency hedging among global investors holding US assets could amplify moves in either direction if market sentiment changes quickly.

What this means for businesses: On a £250,000 transaction, a move towards resistance could reduce the cost for dollar buyers by approximately £1,225. A move towards support could increase the cost by approximately £2,300.

Pound vs Euro

Near term: 50% conviction, broadly sideways with modest downside risk.

The ECB meeting will be the main catalyst for EUR/GBP this week. If policymakers suggest that further rate increases are likely after September, the euro could strengthen against sterling.

UK economic data is relatively limited, meaning sterling is likely to remain particularly sensitive to developments in the eurozone, US markets and global risk sentiment.

Medium term: 40% conviction, gradual sterling strength but limited upside.

The Bank of England is expected to maintain relatively elevated interest rates for longer than the ECB ultimately does, which could provide some support for sterling.

Higher energy prices may also favour the UK relative to the eurozone. The UK’s North Sea production provides some protection from higher energy costs, whereas the eurozone is more exposed to imported energy prices. If energy prices remain elevated, this could become an additional medium term support for GBP.

What this means for businesses: For a £250,000 equivalent transaction, a move towards resistance could reduce the cost for euro buyers by approximately £1,100, while a move towards support could increase the cost by approximately £1,750.

Bottom Line

The yen’s continued strength and the Federal Reserve’s communication blackout provide the backdrop for the week, but the main market catalysts are likely to come from Thursday’s ECB decision and Friday’s US inflation figures.

For businesses with upcoming international payments, the direction of US inflation could be particularly important for sterling and the euro. It will also be worth watching whether sterling’s recent technical weakness continues, particularly if US inflation comes in below expectations and reduces the likelihood of a Fed rate increase.

With several major central bank decisions approaching, exchange rates could become more volatile, making it important to consider upcoming currency requirements rather than relying solely on the prevailing market rate on the day.

7th September  2026

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