Intro

Sterling heads into the new week with some of the momentum from earlier in August having faded, as markets digest a shift in expectations around US monetary policy and continued geopolitical uncertainty.

Last week began positively for the pound, supported by a softer US dollar and relatively resilient UK economic data. However, the tone changed later in the week as US inflation remained persistent and comments from Federal Reserve Chair Kevin Warsh prompted markets to reassess the outlook for US monetary policy.

This week, attention turns firmly towards the US labour market, with employment data likely to be one of the key drivers of currency markets. At the same time, developments around Iran, oil prices and the wider global economy remain important factors for sterling, the euro and the dollar.

GBP — Sterling

Sterling started last week on the front foot, supported by a weaker US dollar and encouraging signs from UK business activity.

UK services and manufacturing data provided some support for the pound, although weaker retail sales highlighted continued pressure on the UK consumer. The pound also remained relatively resilient against the euro as markets continued to assess the differing economic outlooks across the UK and Europe.

The picture changed later in the week following US inflation data and comments from Federal Reserve Chair Kevin Warsh. A more hawkish tone from the Fed encouraged renewed demand for the US dollar and took some of the recent momentum out of sterling.

This week

The UK economic calendar is relatively quiet at the start of the week, with the Bank Holiday limiting activity on Monday.

Attention then turns towards UK manufacturing and services data. These releases will give markets a further indication of whether the UK economy is maintaining its recent resilience or whether higher costs and weaker consumer demand are beginning to weigh on activity.

For sterling, the key question remains whether UK economic data can provide enough support to offset renewed strength in the US dollar.

Our view: Sterling's near-term outlook remains cautious, with increased volatility possible as the week progresses.

EUR — Euro

The euro remained relatively subdued against sterling last week, with markets continuing to assess the outlook for European growth and monetary policy.

European economic data provided some signs of resilience, but the euro remains sensitive to wider risk sentiment and developments in global markets.

The European Central Bank is also facing a difficult environment, with energy prices and geopolitical developments potentially creating additional inflationary pressure while economic growth remains a concern.

This week

There is less significant eurozone data compared with the US calendar, meaning the euro is likely to take more direction from broader market sentiment and developments in the dollar.

European economic indicators will still be important, particularly any evidence of improving or weakening business activity.

Geopolitical developments could also remain a key influence, particularly through their impact on energy prices.

Our view: The euro remains relatively vulnerable to wider market sentiment, with sterling continuing to benefit from a comparatively resilient UK backdrop.

USD — US Dollar

The US dollar was the major story towards the end of last week.

US inflation data showed that price pressures remain persistent, while Federal Reserve Chair Kevin Warsh delivered a relatively hawkish message at Jackson Hole.

Markets subsequently reassessed expectations around US monetary policy, helping the dollar recover some of its previous weakness.

This is particularly significant for sterling and the euro because expectations around Federal Reserve policy remain one of the biggest drivers of global FX markets.

This week

The US takes centre stage with a busy economic calendar.

Markets will be watching:

• ISM Manufacturing PMI
• JOLTS Job Openings
• ADP employment data
• US Non-Farm Payrolls
• Further manufacturing and services data

Friday's Non-Farm Payrolls report is likely to be the week's biggest event.

A stronger-than-expected labour market could reinforce expectations of a more restrictive Federal Reserve and provide further support for the dollar.

A weaker employment picture could have the opposite effect, potentially taking some pressure off sterling and the euro. Oil prices and developments surrounding Iran and the Strait of Hormuz will also remain important, as higher energy prices could add further inflationary pressure to the US economy.

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