The currency markets have witnessed a notable shift in sentiment, with the major forex pairs responding to a rapidly changing set of economic fundamentals and policy expectations. This past week, the dramatic softening in US labor data has reinforced growing speculation that the Federal Reserve will move to cut interest rates at its upcoming September meeting. Let’s break down what’s driving the forex markets across the EUR/USD, GBP/USD, and AUD/USD pairs, as well as key developments to watch in the week ahead.

US Dollar Weakness on Softening Labor Market

After months of resilient US job growth, the latest Nonfarm Payrolls numbers delivered a significant disappointment. The addition of just 22,000 jobs in August—well below expectations—raised fresh questions about the health of the US labor market. The unemployment rate also nudged higher, now at 4.3%. This data only adds conviction to the prevailing market view that rate cuts are imminent. Fed Chair Jerome Powell has highlighted the labor market as a key focus, with inflation no longer the sole guide for monetary policy. Markets are now heavily pricing in a policy cut at the September 17–18 meeting, and expectations extend to over 150 basis points of easing by the end of 2026.

Against this backdrop, the US Dollar Index (DXY) has surrendered ground, ending the week at the lower end of its recent range as traders anticipate a turn toward looser policy. Technical patterns continue to look bearish, and if the DXY slips below recent support levels, deeper losses could follow.

EUR/USD Extends Gains as Dollar Sinks

The euro has surged to five-week highs against the US dollar, climbing well past the 1.1700 mark and peaking around 1.1750. The strong performance is directly linked to the sell-off in the Greenback, as softer US data and heightened expectations of Fed easing lift the euro’s appeal. Next week, euro traders will keep an eye on German trade and industrial production data, as well as the final German inflation reading. These reports could provide further direction, but for now, the euro is primarily riding the wave of dollar weakness.

GBP/USD Holds Ground Amid Mixed UK Data

The British pound continues to stabilize against the dollar, largely trading sideways near the 1.3450 level. UK retail sales offered a modest upside surprise, rising 0.6% in July compared to expectations for a 0.2% increase. Nevertheless, this didn’t spark a strong move in the pound, largely because broader market sentiment remains dominated by US-led themes. With the Bank of England also watching global developments closely, any decisive break for GBP/USD is likely to be driven by US policy moves or major surprises in UK data.

AUD/USD Under Pressure

The Australian dollar is a notable underperformer this week, falling sharply to around 0.6560 versus the USD. Despite the dollar’s overall weakness, the Aussie has faced renewed selling as the Reserve Bank of Australia remains cautious on the prospect of rate cuts. RBA officials are adamant that they want clearer evidence of inflation returning to target before acting. Meanwhile, upcoming Australian CPI data may sway expectations, but with the Fed likely to cut rates before the RBA, a narrowing yield gap means the AUD is vulnerable.

US Tariffs and Global Trade Concerns

Trade policy risks remain a wild card for the US dollar’s path. The Trump administration is rolling out heavy tariffs, including a 100% duty on selected semiconductor imports and additional levies on Japanese products. While the short-term goal is to boost domestic manufacturing, the economic consensus points to rising household costs and potential drag on growth if tariffs are sustained.

Gold Holds Near Record Highs

Gold prices have continued their march higher, briefly surpassing the $3,570 mark before stabilizing around $3,550. The precious metal is receiving strong support from expectations of US rate cuts and ongoing geopolitical uncertainty. As the opportunity cost of holding non-yielding gold falls with lower rates, investor interest in the metal remains robust.

Looking Ahead: US Inflation Data in Focus

Next week, the spotlight turns to a series of critical US macroeconomic reports. Consumer inflation expectations, the NFIB Business Optimism Index, producer prices, and the latest inflation rate release are all on tap. These releases will shape expectations for the September FOMC meeting and could deliver further volatility to major forex pairs. In Europe, German industrial data and final inflation numbers will offer insights into the euro’s momentum.

Traders should remain vigilant and responsive to unfolding economic data, as the interplay between inflation, labor markets, and shifting central bank policy remains the dominant theme guiding price action into the coming weeks.