The United States dollar index (DXY) began the week on firmer ground, ticking up 0.1% to 97.615 after touching seven-week lows last week at 97.253.
Despite the uptick, the broader bearish trend remains intact as markets brace for a widely expected Federal Reserve interest rate cut later in the week.
Last week’s data showed consumer inflation picking up slightly, while jobless claims posted the largest increase in four years.
The deterioration reinforced expectations that the Fed will cut rates by 25 basis points (bp) at its meeting this week, with another reduction likely before year-end.
The CME Group FedWatch Tool is currently indicating a 96.4% chance of a 25bp cut, with a 3.6% chance of a larger 50bp cut.
The Fed convenes amid unusual political pressure. President Donald Trump has nominated a new candidate for the central bank’s Board of Governors while also attempting to dismiss Governor Lisa Cook, an unprecedented move that has raised concerns over Fed independence and global market confidence.
Euro steadies near four-year highs
The euro slipped 0.1% to 1.1728 at the start of the week but remained close to four-year highs.
The EUR/USD currency pair gained 0.18% last week as markets fully priced a Fed cut.
The ECB held rates steady while signalling a data-dependent stance, but the combination of U.S. policy uncertainty and doubts over the Fed’s independence has tilted the bias in favour of the euro.
Australian dollar awaits China data
The Australian dollar held flat at 0.6646 on Monday, consolidating last week’s 1.5% surge that took it to the highest levels since November 2024.
Attention is firmly on Chinese economic data due Monday, with industrial production expected to rise 5.8% year-on-year and retail sales forecast to expand 3.8%.
Australia’s heavy reliance on China’s demand for raw materials makes the figures crucial for the Aussie. Any disappointment could trigger concerns over commodity demand and weigh on the currency.
Sterling steady ahead of BoE
The pound started the week little changed at 1.3555 after gaining 0.4% last week.
UK GDP stagnated in July, with growth flat after a 0.4% rise in June, according to the Office for National Statistics.
The Bank of England meets this week and is expected to leave rates unchanged at 4%, narrowing the policy divergence with the Fed.
If the Fed cuts as anticipated, the relative shift could provide further support to sterling.
Yen weakens amid political turmoil
The yen opened the week 0.3% weaker against the dollar at 147.65, extending last week’s 0.2% losses.
Political uncertainty has intensified after Prime Minister Shigeru Ishiba resigned, leaving Japan in a leadership vacuum.
Prospective successors are split on the Bank of Japan’s monetary stance, adding pressure on the currency.
Despite the volatility, USD/JPY has traded within a 146–149 range since early August.
A joint statement from U.S. Treasury Secretary Scott Bessent and Japanese Finance Minister Katsunobu Kato reaffirmed that foreign exchange should be market-determined and that excessive volatility is undesirable.
Week ahead: Key economic events
On Monday, China releases retail sales, industrial production, and unemployment figures, while the U.S. reports the Empire State manufacturing index.
Tuesday brings UK wage and unemployment data, eurozone industrial production and ZEW sentiment, and U.S. retail sales and industrial production.
Wednesday features UK inflation data, Japan’s trade balance, and Canada’s rate decision.
Thursday is the key event, with the Fed announcing its interest rate decision and economic projections, alongside the Bank of England decision, New Zealand GDP, and Australia’s unemployment figures.
On Friday, attention turns to Japan’s inflation report, the Bank of Japan’s policy meeting, UK and Canadian retail sales, and New Zealand trade data.
China will conclude the week on Saturday with its loan prime rate announcement.
