While August offered fewer tariff shocks than in previous months, forces shaping global currencies are still in play: shifting central bank strategies, fragile economic recoveries, and the ever-present risk of political intervention.
As we step into September, the question markets are asking isn’t whether volatility will return, but where it will strike first.
What happened in August?
Currency movements at a glance:
GBP/EUR: Swing of 1.24%
GBP/USD: Swing of 2.70%
EUR/USD: Swing of 2.69%
Tariff worries take a backseat
It was a quieter month on the tariff front, after Washington agreed a major trade deal with the EU in July (a deal was agreed with the UK in May).
- The tariff pause between the US and China was due to come to an end early in August, but a further 90-day pause was agreed.
- President Trump imposed a 50% tariff on India.
- The US appeals court ruled that most tariffs issued by Trump are illegal. The ruling doesn’t come into effect until 14 October, and the US Supreme Court is likely to become involved.
The euro’s strong showing
The euro is having a good year, rallying strongly against the dollar. After a more challenging July, it regained most of this ground in August, ending the month on a positive note.
- The euro is up around 11% against the dollar and 2.7% against sterling so far in 2025.
- The pound also enjoyed a good month against the dollar, rallying by up to 2% on the back of stronger-than-expected UK economic data and the reduced likelihood of rate cuts in September.
European currencies are benefitting from persistent inflation fears in the US and signs in August that the labour market is weakening. Economic data in Europe and the UK has been mixed this month but edging towards a more positive outlook.
What to watch in September and beyond
Central banks are walking a fine line between boosting sluggish economies and keeping inflation under control.
The Bank of England (BoE) and ECB will be keeping a close eye on inflation rates, unemployment figures and retail sales to judge the speed and solidity of economic recovery. The full impact of US tariffs may also become clear in the next month or two.
Contrasting interest rate strategies
- Markets now put the chances of further rate cuts in the UK this year at below 50%, as inflation edges upwards.
- By contrast, hints from the Federal Reserve (Fed) suggest US rate cuts are likely in September from the current 4.25% – 4.50% range. The Fed had been resisting calls (not least from Trump) to cut rates more quickly, fearing inflation, but a cooling labour market makes early easing more likely.
- The European Central Bank (ECB) is likely to hold rates steady, with its main refinancing options (MRO) rate at 2.15% for at least the next couple of months – perhaps not this year.
Will the euro rally continue?
The euro’s strength is a key theme of 2025 so far and there is currently no expectation of a serious slide. The promise of economic stimulus in the eurozone is attracting investors, and inflation appears generally under control – at least for the time being.
But a run of unexpectedly poor data could upset forecasts and set the euro tumbling. The pound is in a similarly perilous position and is considered a riskier asset than the euro and dollar.
The impact for UK businesses? Euro strength could increase costs, while a weaker dollar may support exporters but adds volatility risk.
The takeaway?
In this atmosphere, the possibility of significant short-term exchange rate movements remains high. Businesses with FX exposure should remain alert to impacts of currency volatility on costs and margins.
