All Shook Up

September 02, 2025

Elias Haddad

UK fiscal jitters rattle currency and bond markets.

US August ISM manufacturing index takes the data spotlight.

ECB is in a good place. Eurozone inflation remains close to the ECB’s 2% target.

Check-out our Drivers for the Week for a look at what markets are facing this week.

US & UK

USD is up across the board, led by a slump in GBP, while UK government bonds (gilt) spearheaded the sell-off in global bonds. Rising long-term gilt yields are trapping the UK’s public finances in a negative spiral ahead of the October Budget.

Investors worry the UK government will prioritize tax hikes over spending cuts in the October Budget to shore up the fiscal position. This is GBP bearish for two reasons: First, the Bank of England (BOE) could step in and purchase gilt to rein-in runaway long-term yields. Second, higher taxes risk deepening the UK’s sluggish growth outlook and add pressure on the BOE to ease more aggressively.

In our view, GBP underperformance will likely be clearer versus EUR than USD. US protectionist trade policy, political interference with the Fed’s independence, and a dovish Fed can further weigh on USD.

US August ISM manufacturing data is today’s focus (3:00pm London, 10:00am New York). The headline index is projected at 49.0 vs. 48.0 in July and the Prices Paid subindex is expected to tick up 0.2pts to 65.0. The combination of sluggish manufacturing activity and rising prices is not USD supportive.

EUROZONE

EUR/USD is down sharply on broad USD strength. EUR/USD should hold above 1.1500. The ECB is in a good place to keep rates on hold as Eurozone inflation remains close to the ECB’s 2% target. In August, headline CPI rose 0.1pts as expected to 2.1% y/y while core CPI printed at 2.3% y/y (consensus: 2.2%) for a fourth consecutive month. Services CPI eased 0.1pts to 3.1%, the lowest since March 2022, but still has some distance to travel to make sure that inflation stabilizes at the target on a sustainable basis.

ECB Executive Board Member Isabel Schnabel delivered hawkish comments. Schnabel stressed “I believe that we may be already mildly accommodative and therefore I do not see a reason for a further rate cut in the current situation.” Further out, Schnabel cautioned that “a more fragmented world with a less elastic global supply, higher fiscal spending and ageing societies is a world with higher inflation. So I think the point where central banks around the world start to hike interest rates again may come earlier than many people currently think.”

Bottom line: EUR/USD uptrend is intact as the ECB is on hold while the Fed is about to resume easing. Nevertheless, political uncertainty in France can further widen 10-year French OAT- German Bund yield spreads and is a near-term headwind for EUR.

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