Dollar Hits 3 Month Low as UK Wage Growth Supports Sterling

Key Highlight

• UK employment conditions weakened again, with payrolls falling for a second consecutive month, but stronger than expected wage growth has helped keep sterling broadly supported.
• The dollar has fallen to a three-month low following a run of weaker US economic data. However, the breakdown in US Iran ceasefire talks has provided some renewed safe haven demand for the dollar this morning.
• Markets are now focused on a busy afternoon of US economic releases, including housing starts, industrial production and import prices. The results will help shape expectations ahead of Wednesday’s Federal Reserve minutes.

Market Recap

Dollar buyers saw more favourable levels yesterday as disappointing US retail sales, weaker employment data and cooling inflation reinforced expectations that the Federal Reserve may have less reason to keep rates higher for longer. The dollar consequently fell to its lowest level since mid-May.

Sterling and the euro both gained against the dollar, leaving GBP/EUR relatively stable. Markets continue to anticipate a more supportive interest rate outlook in the UK and eurozone compared with the US.

The Japanese yen remained under pressure despite the broader dollar weakness. Japan’s Q2 GDP growth came in at 1.1% annualised, below expectations and weaker than Q1. The softer economic outlook reduces pressure on the Bank of Japan to raise interest rates.

The Swiss franc benefited from renewed safe haven demand as Middle East tensions increased, while the Australian dollar performed well as wider risk sentiment remained relatively positive.

UK payrolls fell by 13,000 in July, following a similar decline the previous month, while unemployment increased slightly above expectations to 4.9%. Job vacancies also fell to a new five year low. Despite the weaker employment picture, sterling showed little reaction.

The key support came from wages. Average weekly earnings for the three months to June were stronger than expected, making it more difficult for the Bank of England to ease policy quickly. Markets have therefore not brought forward expectations for a rate cut, keeping shorter dated UK gilt yields elevated.

Meanwhile, US Iran ceasefire negotiations broke down overnight with no extension agreed. Oil prices remain elevated, increasing inflation concerns and providing the dollar with some additional safe haven support.

Market Overview

Euro vs Dollar

Near term: 55% conviction, mildly higher.

EUR/USD remains in an upward trend, although the pair has eased as the dollar benefits from renewed geopolitical demand. The pair continues to test its 200-day moving average from below. A sustained break above this level could provide the momentum for further yearly highs.

Another round of weaker US data this afternoon could support the euro, while any further escalation in the Middle East remains the main downside risk.

Medium term: 50% conviction, mixed.

The outlook remains finely balanced. Expectations of the Federal Reserve remaining more cautious while the European Central Bank continues to tighten policy providing support for the euro. However, persistent US inflation could force the Fed to maintain a firmer stance for longer.

For a €250,000 transaction, a move towards resistance would make purchasing dollars approximately $1,175 more expensive, while a move towards support would improve the cost by around $4,350.

Pound vs Dollar

Near term: 60% conviction, mildly higher.

GBP/USD remains biased higher despite a small pullback this morning. Sterling has been supported by stronger wage growth, which has offset concerns around the weaker UK employment figures and reduced expectations of an imminent Bank of England easing cycle.

The next significant test will come from this afternoon’s US data and Wednesday’s Federal Reserve minutes.

Medium term: 45% conviction, mildly higher with two-way risk.

The outlook remains cautiously positive for sterling, supported by UK interest rates remaining well above US rates on a forward basis. However, the second consecutive monthly fall in payrolls highlights a weakening UK labour market.

Markets are still pricing around 27 basis points of Bank of England rate increases during 2026, although signs of slower UK growth and inflation later in the year could challenge those expectations. Geopolitical developments and the potential impact of a prolonged disruption around the Strait of Hormuz also create significant uncertainty.

For a £250,000 transaction, a move towards resistance would reduce the cost of buying dollars by approximately £132, while a move towards support would increase the cost by around £683.

Pound vs Euro

Near term: 55% conviction, mild sterling strength.

GBP/EUR remains biased towards sterling. Stronger UK wage growth supports the view that the Bank of England may need to maintain higher rates for longer, despite the weaker employment figures.

The euro also faces challenges from elevated energy prices. Higher energy costs can push eurozone inflation and interest rate expectations higher, but they can simultaneously put pressure on economic growth.

Medium term: 40% conviction, mixed with a slight sterling advantage.

The pair remains broadly range-bound, with a modest bias towards sterling. UK interest rates staying above eurozone rates through Q3 provide support, although the weakening UK labour market and persistent inflation create risks in both directions.

For a £250,000 transaction, a move towards resistance would improve the cost of buying euros by approximately £276, while a move towards support would increase the cost by around £246.

Bottom Line

The latest UK data presents a mixed picture, with employment weakening but wages remaining firm enough to keep sterling supported. At the same time, renewed Middle East uncertainty has given the dollar some safe haven demand after its recent decline.

The main focus now shifts to this afternoon’s US data between 13:30 and 15:00, which could determine the direction of GBP/USD and EUR/USD into the close. Wednesday’s Federal Reserve minutes will provide the next important test for expectations around US interest rates.

18th August  2026

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