FX September Commentary

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FX September Commentary

Executive summary

The third quarter of 2025 marks a pivotal shift in global FX markets, with the US dollar (USD) relinquishing its earlier resilience. After holding firm in July, the greenback weakened sharply in August as markets recalibrated expectations for Federal Reserve policy. Chair Jerome Powell’s remarks at Jackson Hole signalled greater concern over labour market risks and hinted at the onset of an easing cycle. Coupled with softer US economic data and renewed doubts about Fed independence, this triggered a broad USD sell-off.

European currencies were the main beneficiaries: the euro (EUR) withstood political turbulence in France, while sterling (GBP) gained on a hawkish Bank of England (BoE) surprise and strong UK data. Yet, both rallies remain tentative, constrained by technical resistance and lingering domestic uncertainties.

As September unfolds, market focus shifts from “Powell’s pivot” to “data dependency.” With an 83% probability priced for a 25bp Fed cut at the September FOMC, the debate now centers on the path of easing: gradual, aggressive, or one-off. The direction of USD through year-end hinges on incoming data and Fed guidance.

 

1. USD Outlook: From July’s Last Stand to August’s Unraveling

July 2025 – Temporary Resilience
The USD began July on firmer footing. Stronger-than-expected June payrolls (unemployment 4.1% vs. 4.3% expected) reduced immediate Fed cut bets, while renewed global trade tensions bolstered safe-haven demand. Fed minutes struck a cautious but hawkish tone, with some officials suggesting further hikes remained on the table.

August 2025 – The Powell Pivot
Momentum shifted decisively in August:

  1. Powell turns dovish – At Jackson Hole, Powell acknowledged downside labour risks and left the door open to cuts, effectively ending the Fed’s tightening bias.
  2. Soft US data – Non-Farm Payrolls missed sharply, with prior months revised lower, confirming labour market cooling.
  3. Fed independence concerns – President Trump’s removal of Governor Lisa Cook stoked fears of political interference, reinforcing expectations of a more dovish Fed.

The DXY index fell over 2% in August, its seventh monthly decline of 2025, though bears failed to breach the key 96.37 low.

 

September 2025 Outlook: Data in Control
The upcoming FOMC meeting (Sept 17) and high-frequency data releases will set the tone.

  • Baseline (68% probability): 25bp cut, initiating a gradual easing cycle. DXY edges lower toward 97.60/97.00, with 96.37 as the key pivot.
  • Hawkish cut: 25bp cut paired with cautious guidance. USD may rebound short term, with resistance at 98.50–98.90.
  • Dovish surprise: Weak data could force discussion of a 50bp cut or accelerated easing. DXY likely breaks below 96.37 toward 95.00.

House view: three Fed cuts in 2025 remain likely, underpinned by US fiscal risks, rising deficits, and gradual erosion of USD dominance in reserve diversification.


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2. EUR/USD & GBP/USD: July–August Review

EUR/USD – Resilience Amid Political Risks

  • Fundamentals: EUR benefited from USD weakness and expectations the ECB is near the end of its cutting cycle. Positive factors included higher German defence spending, signs of Chinese stabilization, and reserve diversification flows. Offsetting this, French politics reemerged as a drag: PM Bayrou’s €44bn austerity budget sparked market jitters, widening French–German spreads.
  • Technical:
    • July range: 1.1550–1.1830, with a double-top forming near 1.1800.
    • August: Early sell-off on French concerns found support near 1.1610/50, then rebounded with USD weakness but stalled at 1.1730–1.1800. Closed August at 1.1690, proving resilient but capped.

GBP/USD – Sterling Outperforms

  • Fundamentals: GBP rebounded strongly in August (+2%) after a sharp July sell-off. A hawkish BoE split vote (1-4-4) surprised markets, signalling concern over sticky services inflation (5.4% y/y). Strong UK data reinforced divergence from weakening US indicators.
  • Technical:
    • July: Fell to major support at 1.3135 before stabilizing.
    • August: Consolidated between 1.3400–1.3600, holding above the 100-DMA. Resistance at 1.3550–1.3600 capped gains, but dips were consistently bought.

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3. September 2025 Outlook

EUR/USD – Balancing Acts

  • Upside (1.1800–1.1912): Requires dovish Fed + weak US data, resolution of French crisis, and stable EU-US trade. Break above 1.1800 targets July highs.
  • Central (1.1570–1.1800): Most likely. Fed cuts but remains cautious; French uncertainty persists. EUR stays range bound.
  • Downside (1.1400): Triggered by failed French confidence vote, ECB dovish shift, or hawkish Fed. A break below 1.1570 opens 1.1400.

GBP/USD – Testing Resilience

  • Upside (1.3789–1.4000): UK outperformance forces BoE to stay hawkish as Fed eases aggressively. Break above 1.3600 key to extending gains.
  • Central (1.3400–1.3600): Supported but capped. BoE steady in September, but fiscal concerns and eventual policy easing cap rallies.

 

CONCLUSION

September’s FX landscape is defined by the handoff from Fed rhetoric to data. While the USD faces structural headwinds, neither EUR nor GBP can mount a sustained breakout without strong domestic catalysts. Range trading remains the prudent stance, with a mild USD-bearish bias prevailing. Volatility around key data and central bank events will be high, requiring nimble positioning as markets transition from anticipation to execution of the new monetary cycle.



 

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