The FX market is heading into an important week, with both the Bank of England and Federal Reserve due to announce their latest interest rate decisions.

Last week, stronger economic data and renewed inflation concerns brought interest rates back into focus. Rising energy prices, driven by the ongoing conflict in the Middle East, are adding further pressure and making it harder for central banks to consider cutting rates.

For GBP, EUR and USD, the key question is how far central banks may need to go to contain inflation without putting too much pressure on economic growth.

🇬🇧 GBP | Sterling

Stronger growth, but inflation remains a concern

Sterling received some support last week after the UK economy grew 0.4% in July, comfortably ahead of expectations. The figures suggest the UK economy is showing more resilience than previously anticipated.

However, stronger growth alongside elevated inflation gives the Bank of England less reason to rush towards lower interest rates.

UK inflation is due on Wednesday, followed by the Bank of England's interest rate decision on Thursday.

Rates are widely expected to remain unchanged, but the Bank's guidance will be closely watched. If policymakers suggest that rates may need to remain higher for longer, or even rise again, sterling could find further support.

Our view: GBP remains supported by the prospect of higher UK rates, although elevated government borrowing costs and uncertainty around the UK's fiscal position remain risks.

🇪🇺 EUR | Euro

The ECB takes a firmer stance

The euro gained support last week after the ECB raised interest rates by 25 basis points in response to renewed inflationary pressure and higher energy costs.

The decision was significant as it showed that the ECB is prepared to act despite the risk of putting further pressure on economic growth.

The focus now shifts to whether further tightening could be required if energy prices continue to push inflation higher.

For GBP/EUR, the key question is whether the ECB or Bank of England ultimately takes the more hawkish approach.

Our view: The euro has gained support from the ECB's more cautious stance on inflation, but its outlook remains closely linked to energy prices and developments in US monetary policy.

🇺🇸 USD | US Dollar

Inflation puts the Fed firmly back in focus

The dollar strengthened last week as US inflation data increased expectations that the Federal Reserve may need to maintain a tighter policy stance.

Consumer inflation remained elevated, while producer prices also increased significantly in August. Combined with relatively resilient employment data, this has strengthened expectations around US interest rates.

The Federal Reserve decision on Wednesday is therefore the key event for USD.

The decision itself will be important, but the bigger focus will be on what the Fed says about the months ahead.

A more hawkish message could provide further support for the dollar. On the other hand, if the Fed places greater emphasis on economic growth, some of the dollar's recent strength could fade.

Our view: USD has regained momentum as markets reassess the US interest rate outlook, although expectations have moved quickly and the dollar could be vulnerable to a less hawkish Fed than anticipated.

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🇬🇧 Wednesday — UK inflation

‍🇺🇸 Wednesday — Federal Reserve decision

‍‍🇬🇧 Thursday — Bank of England decision

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