Introduction
The opening week of September 2025 has been marked by a cautious yet eventful start in forex markets. Investors and traders entered Tuesday with the US dollar on the back foot, slipping to multi-week lows before staging a modest rebound. Thin trading volumes, heightened geopolitical risks, and shifting central bank expectations have contributed to the volatility. Two major economic indicators are set to dominate the market narrative: the Eurozone’s flash inflation data and the US ISM Manufacturing PMI report. These releases have the potential to steer expectations on monetary policy in both regions, recalibrate investor sentiment, and define the trajectory of key currency pairs.
The current climate is one of uncertainty and opportunity. While the dollar’s weakness reflects the growing conviction that the Federal Reserve may soon pivot toward policy easing, the euro’s fate depends on whether inflationary pressures in the bloc remain elevated or start to ease. Meanwhile, the ISM Manufacturing data from the United States will provide a pulse check on the health of the American industrial sector and could either reinforce dovish Fed expectations or challenge them.
The Dollar’s Struggle And Market Sentiment
The US Dollar Index, which tracks the Greenback against a basket of major currencies, has been under consistent pressure, registering its fifth consecutive day of losses as it dipped toward the 97.50 level. This marks a notable shift from the dollar’s position earlier in the summer, when it benefited from a hawkish Federal Reserve stance and resilient US consumer spending data.
The key factor behind the dollar’s slide is the growing probability of a rate cut by the Federal Reserve. Market tools now price in nearly a 90 percent chance of a 25-basis point cut at the September policy meeting. The inflation outlook in the US has softened slightly, with core PCE inflation hovering just below 3 percent, and combined with signs of slowing growth, this has given the Fed room to consider easing.
Yet the dollar’s trajectory has not been purely one-sided. During the Asian session on Tuesday, it staged a slight rebound toward 97.80, driven by geopolitical developments. Renewed conflict in Eastern Europe, with reports of Russian drone strikes on Ukrainian infrastructure, reignited safe-haven flows into the Greenback. This illustrates the delicate balance between economic fundamentals pulling the dollar lower and geopolitical risks lending it occasional strength.
Eurozone Flash Inflation: Crucial For The Euro’s Path
For the euro, the Eurozone’s preliminary Harmonized Index of Consumer Prices (HICP) stands as the central focus. Inflation readings are expected to provide clarity on whether the bloc is still facing persistent price pressures or if the European Central Bank’s policy tightening is finally gaining traction.
If the flash inflation report signals that prices remain stubbornly high, the euro could find support. Such an outcome would pressure the ECB to maintain a cautious stance, delaying any prospects of rate cuts. On the other hand, a softer inflation reading could weigh on the common currency, increasing the likelihood that the ECB may shift toward a more dovish approach in the coming months.
Beyond the economic data, the euro is grappling with political and geopolitical headwinds. In France, the government faces a critical confidence vote next week, creating uncertainty around fiscal policy and stability. At the same time, the ongoing Russia-Ukraine war continues to exert an economic drag on the region, particularly as energy markets remain sensitive to supply disruptions. These elements combine with the inflation outlook to create a volatile environment for the euro.
ISM Manufacturing PMI: The US Economy’s Stress Test
On the US side, the ISM Manufacturing PMI for August represents a pivotal data release. After dipping into contractionary territory for several months, the index is expected to recover slightly to around 49.0, up from July’s 48.0. Although still below the 50 threshold that separates expansion from contraction, an improvement would suggest that US manufacturing is stabilizing after a prolonged downturn.
The PMI data carries significant weight because it directly influences market perceptions of US growth momentum. A stronger-than-expected result could temper expectations of aggressive Fed easing, providing the dollar with short-term support. Conversely, a weaker-than-expected report would likely amplify the case for rate cuts, deepening the dollar’s slide and boosting assets like gold.
Manufacturing is also an important bellwether for broader economic activity, especially given the sector’s sensitivity to global demand conditions, trade flows, and supply chain disruptions. As such, the ISM figures may serve as a leading indicator for how resilient the US economy remains in the face of tightening financial conditions.
Currency Pair Dynamics
EUR/USD: The euro has been trading in a narrow but pivotal range, briefly climbing above 1.1700 as dollar weakness dominated late last week. Momentum carried it to multi-day highs near 1.1730 before political and geopolitical uncertainties dragged it lower in early Tuesday trade. Key technical resistance lies in the 1.1720 to 1.1750 region, while immediate support sits around 1.1650. Traders are closely watching the inflation data for confirmation on the next breakout.
GBP/USD: Sterling has mirrored the euro’s path, benefiting from broad dollar weakness. The pair touched two-week highs near 1.3550, fueled by rising risk appetite and the market’s dovish expectations for the Fed. However, as dollar demand resurfaced ahead of the ISM release, GBP/USD eased back toward 1.3520. The UK’s final Services PMI, due later this week, will also play a role in shaping cable’s trajectory.
USD/JPY: The Japanese yen remains steady, with USD/JPY consolidating around the 147.00 handle. While the dollar’s weakness has kept the pair from breaking higher, renewed risk aversion has capped yen strength. Traders are waiting to see whether the ISM data or upcoming US jobs report can tilt sentiment more decisively.
USD/CHF and USD/CAD: The Swiss franc has been firm, with USD/CHF barely holding above 0.8000. The dollar’s modest recovery has prevented deeper declines, but dovish Fed expectations continue to cap gains. In Canada, the loonie has held strong against the dollar near 1.3750, reflecting stable oil prices and the anticipation of domestic employment data due later this week.
Commodities And Safe Havens
Gold: Gold has been one of the biggest beneficiaries of the dollar’s weakness and heightened global uncertainty. Prices have risen for five consecutive sessions, approaching fresh all-time highs above the 3,400 level. Safe-haven demand, dovish Fed expectations, and lingering geopolitical risks have all combined to fuel the rally. Traders now await the US jobs report later in the week as the next catalyst for gold’s trajectory.
Oil: Crude oil prices also firmed, reaching five-day highs near 65 dollars per barrel. The rebound was supported by the weaker dollar, which makes commodities cheaper for foreign buyers, and renewed concerns about supply disruptions linked to geopolitical tensions. If global demand signals improve alongside manufacturing data, oil could extend its gains in the short term.
Looking Ahead: Key Events On The Calendar
Several key events are poised to shape market movements in the days ahead:
Eurozone Flash HICP Inflation – Provides the first look at consumer price trends in the bloc for August.
US ISM Manufacturing PMI – A key gauge of the American industrial sector’s health.
Final Services PMIs for the UK and Japan – Offering further insights into global growth momentum.
US Employment Data – Including ADP Employment, JOLTS Job Openings, and Nonfarm Payrolls. These will play a critical role in guiding Fed policy expectations.
Strategic Outlook
The strategic outlook for forex markets remains mixed. The dollar’s medium-term bias is lower, given the near-certainty of Fed rate cuts. However, the path is unlikely to be linear, as geopolitical risks and potential upside surprises in US data could provide intermittent support.
The euro and pound remain positioned to benefit from dollar weakness, but their rallies are constrained by domestic political instability and the potential for softer inflation or growth readings. For commodity currencies such as the Canadian dollar, local data releases will be critical in shaping sentiment, while safe-haven flows continue to support gold and limit downside for the yen and franc.
Conclusion
As September trading gets underway, forex markets are caught in a delicate balancing act between economic fundamentals, central bank expectations, and geopolitical risks. The Eurozone flash inflation report and the US ISM Manufacturing PMI are set to provide critical signals on both sides of the Atlantic, shaping not only currency moves but also broader risk sentiment across global markets.
The dollar’s weakness may persist if data continues to validate dovish Fed expectations, while the euro and sterling stand to benefit from relative resilience. At the same time, gold and oil remain supported by safe-haven demand and supply dynamics. Traders should prepare for heightened volatility as the week progresses, with the US jobs data looming as the ultimate arbiter of short-term market direction.