Monetary policy divergences should continue to weigh against the USD. Last Friday’s US nonfarm payrolls, which came in at a paltry 22k in August, have cemented market pricing for the Fed to lower interest rates in the remaining three FOMC meetings of 2025. The upcoming US CPI report on September 11 will likely frame tariff-driven inflation as transitory supply-side noise, keeping the Fed focused on labour market weakness within its dual mandate.



On September 11, we expect the European Central Bank to deliver a hawkish hold, a strong signal to keep the deposit facility rate unchanged at 2% for the rest of the year. Only three central banks are expected to lower rates by the end of 2025 – one more cut in Canada and Australia, and two more in New Zealand.

While Fed cut expectations are weighing on the greenback, political headwinds are limiting optimism in several DXY currencies. They include leadership uncertainties in France and Japan, countries with minority governments. Before the weak US jobs data, the GBP, EUR, and JPY were pressured by higher long-dated government bond yields, driven by rising concerns about the fiscal health of major economies. 

France’s political crisis will temper optimism in the EUR/USD, keeping it to a 1.16-1.18 range. Prime Minister Francois Bayou is widely expected to lose the confidence vote on September 8; his centrist coalition holds only 210 out of the 577 seats. If so, Bayou’s departure as the fourth premier in 20 months will weaken President Emmanuel Macron. A Verian poll found "only 15% of French people trust Macron to resolve the political crisis." Unfortunately, there is no obvious solution. Macron will likely resist pressure from the far-left and far-right parties to call for new parliamentary or presidential elections.

USD/JPY consolidated inside a 146-149 band following its decline from its August 1 peak of 151. The currency pair’s decline from 148.80 to 146.80 was driven by the US-Japan trade deal inked on September 4 and the weak US jobs report on September 5.

Japanese Prime Minister Shigeru Ishiba’s resignation on September 7 should arrest the short-term optimism in JPY. Ishiba will remain as premier in a caretaker capacity until the Liberal Democratic Party (LDP) formally elects a new leader, hinting at a prolonged period of political uncertainty. Having lost the coalition’s majority in both houses of parliament, the LDP would likely bypass the option of holding a “simplified election” to quickly choose a new leader and keep to the “standard procedure” for transparency and legitimacy. Following Fumio Kishida’s resignation on August 14, 2024, the LDP announced on August 21 that it would hold party elections on September 27, which led to a run-off on the same day, and Ishiba’s confirmation as prime minister on October 1. It did not prevent the LDP-Komeito coalition from losing its majority in the Lower House elections on October 27. 

For now, the market is focused on two leading candidates. First, Sanae Takaichi is a far-right conservative who is a firm believer in aggressive fiscal spending and a vocal opponent to BOJ hikes – considered detrimental to the JPY. Second, the market will likely consider Shinjiro Koizumi, who is a centrist with progressive views, as neutral for the JPY. However, Koizumi will likely pursue a path of policy continuity of the previous administration despite positioning himself to the left of Takaichi on social and economic policies.

GBP/USD is supported at its 1.34 support level after failing to break below 1.32 on August 1. The UK fiscal credibility concerns that weighed on GBP have subsided slightly. The 30-year Gilt yield eased 25 bps to 5.50% last Friday, after peaking at 5.75% (the highest since May 1998) on September 3, aligning with the decline in US bond yields following Fed cut expectations. On September 3, Bank of England Governor Andrew Bailey’s remarks to the House of Commons Treasury Committee also shifted attention from long-dated to short-dated bonds. At next week’s BOE meeting, Bailey will likely reiterate doubts about more rate cuts. He should also play down the significance of the 30-year yield, emphasizing that the UK has shifted issuance away from the longest-dated debt.

Prime Minister Keir Starmer’s cabinet reshuffle (on September 5) could be an opportunity for him to regain voter trust and reassure markets. Angela Rayner’s resignation as deputy prime minister over a stamp duty scandal allowed Starmer to distance himself from the ethical lapses that voters associated with Conservative-era scandals. The shake-up of Starmer’s Downing Street team was pitched as moving into a “second phase” of government, aimed at addressing voter dissatisfaction that policy delivery has lagged election promises.

Starmer’s appointment of Baroness Minouche Shafik as his chief economic adviser sends a strong message of fiscal seriousness and economic stability. Her extensive experience at the IMF, the World Bank, and the BOE provides immense credibility at a time of growing concern over the government's economic direction. Shafik’s appointment as a respected, non-partisan figure represented Starmer’s commitment to seeking independent, expert advice rather than relying on political allies. The first real test will come at the Autumn Budget scheduled on November 26, where Chancellor Rachel Reeves has been struggling with the fiscal rules amid declining headroom. Here, the appointment of former Resolution Foundation economist Dan Tomlinson as Exchequer Secretary suggested that wealth taxes would be a key focus of the Autumn Budget.

Quote of the Day
“If you're going through hell, keep going.”
    Winston Churchill

September 8 in history
Michelangelo's statue of David was unveiled in Florence in 1504.

Philip Wee

Senior FX Strategist - G3 & Asia

[email protected]