Last week was relatively quiet across currency markets for much of the period, particularly compared with the level of geopolitical volatility we have become accustomed to this year.
There were no major breakthroughs in the U.S.–Iran situation, energy markets remained relatively contained, and for much of the week investors were able to turn their attention back towards economic fundamentals.
Then Friday changed the conversation.
The latest US Non-Farm Payrolls report showed the American economy losing 23,000 jobs in July, a significant deterioration in the labour market and one that immediately put the US Dollar under pressure. Perhaps just as importantly, previous payroll figures were revised lower, adding to concerns that the slowdown in employment is not simply the result of one poor month.
This matters because the Federal Reserve has spent much of the past few months focused predominantly on inflation. Only recently, three FOMC members voted in favour of raising interest rates, and markets had increasingly accepted that another rate hike remained possible before the end of the year. A weakening labour market complicates that argument considerably.
The Fed now faces an increasingly difficult balancing act. Inflation remains above target and geopolitical risks continue to threaten energy prices, but raising interest rates into a labour market that is beginning to contract carries obvious risks of its own. One payroll report does not establish a trend, but Friday’s numbers make the next few employment releases significantly more important and could leave the Dollar vulnerable if evidence of a broader slowdown continues to build.
Geopolitics isn’t going away either
Over the weekend, attention shifted back towards the Middle East after Israeli Prime Minister Benjamin Netanyahu rejected President Trump’s 15-point peace proposal for Gaza, insisting that Israeli forces will not withdraw until Hamas has fully disarmed.
That disagreement creates another layer of uncertainty at an already delicate moment for the region. Markets have spent recent weeks hoping that progress between the United States and Iran could gradually reduce the geopolitical risk premium that has dominated much of 2026. Renewed tensions surrounding Gaza do not automatically derail those negotiations, but they certainly make the wider diplomatic picture more complicated.
For markets, the question is whether this remains primarily a political dispute or begins feeding back into the broader regional conflict. Any deterioration that threatens progress with Iran or creates renewed concerns around energy supplies would quickly bring oil, inflation and safe-haven demand back into focus.
So we begin the week with an interesting change in the market narrative. The Dollar has lost some of the economic support it enjoyed following Friday’s employment report, while geopolitical uncertainty remains elevated. That makes this week’s U.S. inflation numbers particularly important.
Tuesday: Australia and interest rates
Monday’s calendar is relatively light, so the first major event arrives on Tuesday with the Reserve Bank of Australia’s latest interest rate decision.
Rates are expected to remain unchanged at 4.35%, meaning the decision itself should contain few surprises. The more important element will be the accompanying statement and press conference, where markets will be looking for clues as to whether policymakers believe further tightening may still be required this year.
With inflationary pressures remaining a concern globally, any indication that another hike remains firmly on the table could provide support for the Australian Dollar.
Wednesday: Can inflation rescue the Dollar?
Wednesday is arguably the most important day of the week, with the latest US CPI report.
Core inflation is expected to rise by around 0.2% month-on-month while continuing to moderate on an annual basis. Headline inflation is also expected to ease compared with the previous month.
Ordinarily, softer annual inflation would be welcomed by markets. This time, however, the context is very different.
Friday’s employment report has introduced genuine questions about the strength of the US economy. If inflation also surprises to the downside, markets may begin seriously questioning whether the Federal Reserve can justify another rate increase this year. That combination could put further pressure on the US Dollar.
Conversely, a hotter inflation print would leave the Fed facing an uncomfortable combination of weaker employment and persistent price pressures. That would make the future path of U.S. interest rates considerably more difficult to predict and could create significant volatility across currencies, bonds and equities.
Thursday: Sterling faces its biggest test
Thursday belongs firmly to the Pound.
The UK releases GDP, Trade Balance, Industrial Production and Manufacturing Production figures, giving markets a broad assessment of how the British economy is performing.
GDP growth is expected to slow to around 0.4%, while the broader outlook for several of the accompanying releases is relatively subdued.
This matters because Sterling has performed reasonably well across several major currency pairs this year, supported partly by expectations that the Bank of England will need to maintain relatively restrictive monetary policy.
Strong UK data would reinforce that argument and could provide another boost for the Pound. However, disappointing growth and production figures would create a much more difficult picture. If inflation remains elevated while economic activity begins deteriorating, the Bank of England faces the same uncomfortable problem increasingly confronting other central banks: how do you fight inflation without doing unnecessary damage to growth?
Later in the day, attention returns to the United States with weekly jobless claims and Producer Price Inflation. Following Wednesday’s CPI release and Friday’s weak payroll numbers, employment data will suddenly carry considerably more weight than it did only a few weeks ago.
Friday: Europe ends the week
The week concludes with another important set of releases from both sides of the Atlantic.
Eurozone employment, GDP and Trade Balance data will provide an update on the health of the European economy, with GDP growth expected to improve. A stronger-than-expected reading would be particularly interesting given the ECB’s increasingly hawkish stance and could provide additional support for the Euro.
Finally, we receive US Retail Sales, expected to show modest growth of around 0.2%. Consumer spending has remained one of the key pillars supporting the U.S. economy, so any significant weakness here, particularly following Friday’s employment shock, would add another piece to the argument that economic momentum is beginning to slow.
The bigger picture
For me, this week comes down to one question: was Friday’s employment report an anomaly, or the beginning of a meaningful deterioration in the U.S. economy?
If inflation continues falling while employment and consumer activity weaken, the argument for another Federal Reserve rate hike becomes considerably harder to sustain. That would remove one of the strongest fundamental supports behind the US Dollar and could create further opportunities for GBP/USD and EUR/USD to recover.
If CPI remains stubbornly high, however, the picture becomes much more complicated. The Fed would then be facing weakening employment alongside persistent inflation, leaving policymakers with very little room for manoeuvre.
Sterling has its own test on Thursday. Stronger UK growth would reinforce the Pound’s recent resilience, while disappointing GDP and production numbers could quickly challenge it.
And sitting above all of this is geopolitics. The disagreement over Gaza adds another source of uncertainty to a Middle East already dealing with the unresolved U.S.–Iran conflict. Any escalation capable of pushing energy prices materially higher could change the inflation picture again almost overnight.
So while this week’s calendar gives us plenty to work with, I think the most important thing to watch is how the narrative around the US Dollar develops. Friday gave markets the first serious reason in some time to question the resilience of the U.S. labour market. Wednesday’s inflation report will tell us whether that weakness gives the Fed room to be patient, or whether policymakers are heading towards a much more uncomfortable second half of the year.
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