Driving FX Markets in August

Markets have responded positively to the certainty brought by the US-EU and US-Japan trade agreements, along with an extended truce with China. This has contributed to a strengthening of the US dollar in recent weeks. With fears of a global trade war now significantly reduced, attention is likely to shift back to economic data and interest rate expectations. In our view, the trajectory of US interest rates will be the primary driver for FX markets in the coming months – so expect me to keep linking everything back to that for the foreseeable future. 

President Trump is pushing for a rapid reduction in US interest rates. However, inflation remains elevated and economic data has generally held up well, supporting the case for higher rates in the short term. This has created ongoing tension between Trump and Federal Reserve Chair Jerome Powell, a dynamic that is likely to persist until Powell’s term ends in May 2026. 

The Bank of England’s next interest rate decision is scheduled for Thursday, 7th August. Markets anticipate another rate cut to 4.0%, with only one or two additional cuts expected over the next 12 months. We currently forecast rates to reach 3.5% by around April 2026. However, this outlook could shift quickly if inflation remains stubbornly high or if economic data disappoints. 

In the UK, growing anticipation around the Autumn Budget and persistent fiscal concerns could also exert downward pressure on the pound. 

Overall, we believe the sentiment that drove extreme USD weakness over the past six months has largely faded. As a result, we’re wary that markets may begin to reverse the recent trend unless there is a further shock to markets. 

Source: Money Corp