Sterling and the euro traded within narrow ranges against the dollar on Wednesday. Although risk appetite improved and global equities advanced, the US currency avoided the selling pressure that would normally accompany this market environment. Sterling rose 0.13 percent to $1.3466, while the euro gained 0.08 percent to $1.1541, but both currencies struggled to extend their advances as the dollar index remained close to 100 during the early part of the session.
The dollar’s resilience became more notable as Brent crude fell below $80 a barrel and reports suggested progress in talks between Washington and Tehran. Lower energy prices and stronger demand for risk assets would usually reduce demand for the US currency, but expectations that the Federal Reserve could still raise interest rates in September continued to provide support.
Markets reduced their estimate of a possible September rate increase to about 14 basis points, compared with between 16 and 17 basis points at the beginning of the week. The adjustment followed weaker US job openings data, although it was not large enough to trigger broad selling in the dollar.
Investors are now focused on the US nonfarm payrolls report, which is expected to play a central role in shaping interest rate expectations. ADP figures showed that private employers added 44,000 jobs in July, below forecasts of 68,000 and down from 95,000 in June. Although the figures point to slower hiring, they do not yet indicate a severe deterioration in the labor market.
The Institute for Supply Management services index rose to 54.1 in July, confirming that business activity continued to expand, although the reading remained below expectations. At the same time, the prices component stayed above 70, indicating that cost pressures remained elevated across the services sector.
This combination leaves the Federal Reserve facing a difficult balance. Slower employment growth supports a less restrictive policy stance, while persistent price pressures and energy market risks keep inflation concerns alive. Some estimates suggest that the US economy added about 90,000 jobs in July, with the unemployment rate holding at 4.2 percent. A stronger reading could restore support for the dollar, while a noticeably weaker result could reduce expectations of another rate increase.
Sterling’s movement was not driven by a clear improvement in British economic conditions. The Bank of England’s latest vote showed a slightly more restrictive position than markets had expected, with six members voting to keep rates unchanged and three supporting a different course. However, Governor Andrew Bailey reduced expectations of near term tightening by maintaining that disinflation remained on track.
Several policymakers also indicated that interest rate cuts could return to the discussion if tensions in the Middle East continued to ease. This encouraged investors to reduce expectations for higher British interest rates during 2026 and limited the pound’s ability to build stronger gains.
The euro also failed to benefit fully from improving economic data. The euro area economy expanded by 0.4 percent during the second quarter, its fastest pace since early 2025, while inflation accelerated to 2.9 percent in July. These figures kept the possibility of a European Central Bank rate increase in September under consideration, but dollar demand and domestic risks prevented a stronger advance.
Drought conditions and falling river levels across Europe may also weigh on the single currency by disrupting industrial transportation and supply chains. The area between $1.1550 and $1.1560 remains an important resistance zone for the euro. A sustained move above this range could open the way toward $1.1615 and $1.1620, provided that risk appetite remains firm and euro area data continue to improve.
Later in the session, the dollar index fell 0.2 percent to 99.68, its lowest level in seven weeks, as optimism increased over a possible agreement between the United States and Iran. Hopes of reopening the Strait of Hormuz and reducing risks to global energy supplies weakened demand for the dollar as a safe haven, although investors remained cautious before the release of US employment data.
In Japan, the dollar traded near 157.69 yen after coordinated intervention by Japan and the United States moved the Japanese currency away from 164 yen per dollar, its weakest level in four decades. The operation marked the first joint purchase of yen since 2011 and the first direct US involvement in supporting the currency since 1998.
The intervention helped slow the yen’s decline, but a lasting recovery will require support from Japanese monetary policy. Currency market operations can influence prices temporarily, but they cannot fully resolve the wide difference between US and Japanese interest rates. Minutes from the Bank of Japan showed that some members favored faster rate increases as inflation was expected to rise during the second half of the fiscal year.
Talks concerning the reopening of the Strait of Hormuz remain a major driver for currencies, energy prices, and bond markets. US officials indicated that an agreement could be close, while Iran said discussions with Oman had reached an advanced stage. A successful agreement could push oil prices lower, ease inflation expectations, and reduce the likelihood of further US monetary tightening, which would place additional pressure on the dollar. Renewed tension or a breakdown in negotiations could have the opposite effect by supporting the US currency and pushing energy prices higher.
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