Sterling has clawed back a bit of ground following the latest Bank of England interest rate meeting.

As widely expected, they cut rates by 0.25%. However, the voting pattern surprised markets with a more hawkish tilt. While general expectations were for a 7-2 split in favour of a cut, the actual vote ended up coming in much closer with just five members in favour of a cut and four preferring to keep rates on hold. This narrow margin suggests that the BoE appear to be more concerned about persistent inflation than the weakness in the broader economy and UK labour market. They also reiterated that further cuts need to be “gradual and careful”. As a result, the Pound has erased some of its recent losses.

In other news, the USD was heavily sold off after Friday’s poor non-farm payroll figures. Not only does the data suggest that American businesses are holding off on hiring due to tariff-related uncertainty, but that the Fed will probably have no choice but to lower rates as soon as their next policy meeting in mid-September. This is quite a shift in narrative from this time last week where a rosier picture was being painted of the US economy. Upcoming US economic data releases will therefore be closely scrutinised as the market remain sensitive to which direction the Fed are moving.

As a result, the GBP/EUR rate has risen nearly 1-cent today and currently trades at 6-day high. The GBP/USD is up 0.5% today and over 2% higher from the start of the month (currently sitting at 11-day high).

Bank of England

Sterling strengthens after BoE vote to cut (0.25%) by narrow majority

The Euro has weakened as optimism over the US-EU trade deal has quickly faded.

At the start of the week, the US and EU reached a deal that imposes a baseline 15% tariff on most European goods (including autos) entering the US market. Following the announcement of this deal, European assets initially opened higher on Monday as investors breathed a sigh of relief that a deal had been done and that the worst-case scenarios had been avoided (i.e. 30-50% tariffs). However, these gains proved short-lived as the reaction from European leaders and investors has been largely negative as the details were further digested on the deal.

While the 15% tariff is better than the previously threatened 30–50%, it's higher than the 10% target EU negotiators were pushing for and there are concerns the deal is skewed in favour of the US versus Europe which may have negative economic implications for Europe moving forward. Clearly, it seems they felt that accepting the higher baseline level was a better option than the pain of potentially drawn-out negotiations and uncertainty whilst also coping with super high tariff levels. They will hope to eventually bring these tariff levels down over time, but it will likely lead to a reduction in the European GDP in the short to medium term.

In other news, the USD has strengthened against most currencies so far this week, as markets bet that the signing of trade deals will ease the burden on the US economy. Combined with month-end flows, the recent resilience in US economic data and the fact the USD had been heavily sold this year, then it’s no surprise the Dollar has become more attractive to investors. We will shortly see the release of the latest US GDP figures (1.30pm) and then the latest Federal Reserve interest rate meeting tonight. The Fed will likely once again defy pressure from President Trump and keep interest rates on hold for the fifth consecutive meeting. However, Chair Powell will likely keep the door open to a September cut but without fully committing to one either. The most interesting aspect of the meeting will likely be whether there are any dissenters in the committee voting for an immediate cut.

As a result, the GBP/EUR has rebounded around 1.5-cents from Monday morning and now trades at a 2.5-week high. The EUR/USD has slipped 2.5 cents lower and sits around a 5-week low. The GBP/USD dropped nearly 1% this week and traded down to the lowest levels in 10-weeks.

Euro

Euro slips as investors question US trade deal

The pound remains under pressure amid ongoing concerns about the UK economy.

Yesterday’s UK PMI figures – a forward-looking data set – disappointed with the combined numbers barely in growth territory at 51.0 (vs expected 51.9 and previous 52.0). Perhaps the biggest concern in the data was the sharp slowdown in hiring, with firms cutting jobs in response to the rising costs associated with April’s hike to business tax rates and the national minimum wage. Furthermore, UK retail sales figures out this morning have also fallen short of expectations (0.9% in June vs 1.2% estimates), albeit making a large rebound from the previous month’s abysmal numbers (-2.7% for May).

The fragile growth and labour market outlook presents a dilemma for the Bank of England. The big question is whether they will prioritise jobs or inflation. While a 0.25% cut remains extremely likely in August, there’s a reasonable chance that fears over the latter will limit the pace of easing beyond that.

As anticipated, the European Central Bank held interest rates on hold yesterday which is the first pause in over a year. However, President Lagarde delivered a more hawkish tone than expected in the accompanying press conference, highlighting stronger than expected economic performance and inflation progress. Therefore, the ECB is clearly in no rush to lower interest rates again, although it’s likely they’re keeping their options open and await further news on the trade talks and developments in the economy before potentially committing to another cut (i.e. wait-and-see mode).

Across the pond, US economy continues to appear remarkably resilient. Yesterday’s solid PMI figures point to sustained strength and businesses seem unfazed by lingering trade uncertainties. The big news of the week was the signing of a US-Japan trade deal and reports that the US and European Union are apparently close to reaching a framework trade agreement that will see a baseline tariff rate of 15%. By recent logic, the prospect of lower tariffs should be bullish for the greenback, but the USD has found gains hard to come by so far this week which is a bit of a surprise.

As a result, the GBP/EUR is down around 1-cent from this week’s high and hit a 3.5mth low (and close to the lowest since Oct 2023). The GBP/USD is down nearly 1% from yesterday and trades at the lowest levels since Monday. Next week, traders will continue to review the progress on trade negotiations and how the market react to this, along with the latest Federal Reserve interest rate meeting.

Inflation

Sterling struggles amid ongoing UK economic sluggishness

Sterling remains under pressure as UK economic data continues to disappoint.

Friday’s GDP figures showed a 0.1% contraction in May, missing expectations for modest growth (+0.1%) and following April’s 0.3% contraction. This has raised expectations that the Bank of England may be forced to cut rates further and markets are now pricing in around a 90% chance of a cut next month. The data also raises the risk of additional tax hikes in the autumn and keeps upward pressure on government borrowing costs (Gilt yields remaining elevated and cautiously monitored by markets). As a result, the Pound has continued to underperform against most of its major peers in the past week or so.

Traders will be keeping a close eye on the upcoming UK data releases to see if this pattern continues. This week sees the latest UK inflation report (Weds) and then (perhaps even more importantly) the latest UK jobs numbers (Thurs). There are growing signs that employers are reacting badly to the latest round of tax increases and therefore this release will come under even closer scrutiny than usual and should provide a clearer view of the extent of the weakness in UK economy. 

In other news, Trump continues to threaten very high tariffs to start in August. Notably, markets appear to be generally taking these threats in their stride (we’ve been here before I guess) and appear relatively desensitised to events on that side. Only the US Treasury market continues to send ominous signals, where long-term yields are rising in response to the latest budget bill and ballooning deficit forecasts, but even this is so far orderly. 

Overall, the USD has been steadily recovering from its more recent lows as the US data shows resilience and, so far, has (seemingly) not been hit too hard over Trump’s tariffs. Even feedthrough from the tariffs to inflation has been very limited so far, but this likely can’t last forever. Importers will eventually run out of the inventory they accumulated earlier in the year before the tariffs hit and prices should eventually adjust upwards (especially given strong consumer demand). All eyes will be on tomorrow’s US inflation report for clues on whether the Fed are right to keep interest rates on hold or yield to political pressure from Trump to cut rates.

Tuesday’s US inflation data will therefore draw a lot of attention and provide further clues on whether the Fed are right to keep interest rates on hold or whether they should be looking to cut rates as being pushed by President Trump.

As a result, the GBP/USD has lost around 3-cents since the start of July and trades around a 3-week low. The GBP/EUR has continued to slip lower and trades around a 3-mth low. The EUR/USD has steadily ticked lower to a 2.5-week low having lost around 1% this month.

economy

Sterling on the back foot as data disappoints

Sterling has lost some ground this morning following a softer than expected UK labour report.

The unemployment rate rose as anticipated to 4.6% (from 4.5%), which is the highest reading since June 2021. The data also showed that average annual earnings (inc. bonuses) dropped to 5.3% (from 5.6%) versus expectations for a 5.5% rise. Furthermore, the number of people claiming jobless benefits has jumped by 33.1K (vs. an expected 9.5K rise) which is the most since July last year.

This report suggests that the government’s hike to employer National Insurance contributions and the minimum wage (which came into force in April) is causing employers to hold off on hiring and increase layoffs. This rising unemployment and softer wage inflation could likely push the Bank of England to cut interest rates sooner than expected and markets are pricing in two further rate cuts before the end of the year.

As a result, the GBP/EUR rate is down half a cent this morning and trading at a 4-week low. The GBP/USD is down a cent from yesterday’s high and towards the lower end of where it’s traded so far this month.

Next up on the data front we have US inflation data tomorrow afternoon, UK GDP on Thursday, and US consumer sentiment data on Friday. More importantly, headlines surrounding today’s US-China trade talks could dominate the USDs performance depending on the outcome (positive talks would likely support the USD).

matt-noble-VpGAhrqRAsw-unsplash

Sterling dips as UK jobs report disappoints

The USD has strengthened today after the US and China agreed to slash tariffs on each other’s goods by 115% for a 90-day period. This means that goods imported from China into the US will now face 30% tariffs, while US exports to China will be subject to a 10% levy.

Although only a temporary pause to allow for continued negotiations, this unwinding in tariffs was significantly larger than expected by markets (which was roughly around 50%) and it represents a major de-escalation in the trade war between the two superpowers. Consequently, both the USD and Chinese Yuan have strengthened, while traditional ‘safe haven’ currencies (e.g. Swiss Franc and Japanese Yen) have lost some shine this morning.

As a result, the GBP/USD has dropped nearly 1.5-cents today and trades around 1.5% lower than last week’s high. Similarly, the EUR/USD has declined by around 1.5-cents from opening and now trades around 2.5% below last week’s high. Meanwhile, the GBP/EUR has gained around 1.2% higher from last week’s lows and currently trades around a 5-week high.

Market participants will continue to monitor any developments over the tariff situation this week. However, a busy calendar of key economic data releases this week will also draw traders’ attention. The key data points to watch out for this week includes UK job figures (Tues), US inflation (Tues), UK and EU GDP ((Thurs), US retail sales (Thurs) and finally US consumer sentiment data (Fri).  

Trade

USD strengthens as US & China agree to pause tariffs

Markets were relatively calm last week - until late on Friday, when President Trump launched a series of personal attacks against Federal Reserve Chair Jerome Powell.

On his social media feed, Trump labelled Powell “a major loser” for not lowering interest rates, criticising him for being too slow to act in support of the US economy. This has raised concerns that Trump might attempt to remove Powell from his position. While the legal grounds for such a move remain unclear - and Powell himself has stated that he does not believe the President has that authority - the mere suggestion has unsettled investors. Since markets reopened on Sunday night, we’ve seen a broad sell-off in US stocks, bonds, and the USD.

Generally, market sentiment remains dominated by the unpredictability of the White House, pushing economic data into the background. However, tomorrow’s PMI reports will offer a valuable first look at how much damage Trump’s erratic policy approach has done to business confidence. Recent sentiment surveys have consistently painted a uniformly bleak picture, with both consumers and manufacturers fearing rising prices/costs from tariffs. Manufacturers, in particular, are holding back on investment - an ironic twist, given this is the very sector Trump aims to support.

Since “Liberation Day”, the Euro has emerged as one of the best-performing major currencies which suggests that Eurozone markets are receiving a significant part of the capital that is fleeing the US. Notably, the Euro continued to strengthen even after last week’s relatively dovish ECB meeting - underscoring investors’ growing preference for the Eurozone’s institutional stability over the US's policy turmoil.

As a result, the GBP/USD rose around 2% higher from last week’s low and has traded towards the highest levels in 3-years (to around where it briefly spiked last September). The EUR/USD climbed to nearly 2.4% above last week’s low and to a 3.5yr high. Meanwhile, GBP/EUR has remained within a relatively tight range over the past week, currently trading about 1% above its recent lows.

Trump's Fed attacks fuel 'Sell America' trade narrative

In a dramatic turn, last night President Trump announced he was postponing (reciprocal) tariffs above 10% for most countries by 90-days – except for China, where total tariffs were raised to 125% from 104%! Markets rallied overnight and into this morning on hopes that this delay signals room for negotiation and eventual de-escalation of the situation, which will hopefully limit the global economic fallout.

While there are no guarantees when Trump is involved, it seems unlikely that such extreme tariffs will remain in place, especially given the growing recession risks they pose. Trump’s change of heart is likely in response to the sharp sell-off in equities, the bond market rout and intense pressure from Republicans and resultant pressure from business leaders – a self-inflicted recession isn’t particularly the legacy the 47th President wants.

Equity markets have led the gains, with US equity indices posting double digit gains last night (e.g. Nasdaq up over 12% which is the second largest on record) and Asian/European stocks rallying this morning. Safe havens like the Japanese Yen and Swiss Franc have also fallen. The Chinese yuan, however, remains at 18-year lows and tensions with China appear harder to resolve.

Uncertainty remains very high and the fact that key policy decisions are seemingly being made almost entirely off the cuff (Trump’s top trade official was reportedly unaware of the delay until after announcement) is a bit unnerving. Again, there are no guarantees here (a delay is still just a delay and not a cancellation), but the fact that Trump appears open to negotiation suggests the previous sky-high average US tariffs will likely come back to more realistic/sustainable levels, which is coming as a relief to markets.

As a result, the GBP/USD has recovered over 1.2% from Monday’s low and the GBP/EUR bounced around 1.2% higher from yesterday’s low. The EUR/USD remains very choppy and continuing to see-saw around the 1.10 mark. Today, we see the release of the latest US inflation figures and tomorrow we have UK GDP data. Both are likely to be very overshadowed by the more recent developments and more time will be needed to see the real impact of tariffs on inflation/growth.

Tariffs

Stock markets rally as Trump announces 90-day delay to reciprocal tariffs

President Trump’s tariffs have continued to wreak havoc in financial markets. Major stock indices continued to tumble into this week as investors concerns grow over a slowdown in the global economy (albeit we’ve seen a bit of a rebound so far today).

The perceived ‘safe haven’ currencies (e.g. the Japanese Yen and Swiss Franc) have been in heavy demand due to the high levels of uncertainty. Furthermore, after the initial large selloff in the USD last Thursday, the US currency has since rallied back as the sharp selloff in stock markets and risk assets boosted the safe haven appeal of the Dollar.

Yesterday, China announced proposed counter tariffs of 34% and vowed to “fight to the end”, despite Trump’s warning of another 50% tariff should they not withdraw this countermeasure. The EU has taken a less aggressive approach and appears open to negotiation, while also floating the idea of potential 25% tariffs on some US goods. Interestingly, the Euro has so far been quite resilient to the tariff news even though their economy is heavily exposed to these import taxes which currently stand at 20%. Some analysts are arguing this is because the Euro is emerging as a de facto safe haven given the currency’s high liquidity and the bloc’s solid current account surplus.

Surprisingly, Sterling has been among the worst performing major currencies (particularly against the Euro). We would expect the UK to be relatively isolated from the tariffs given its low exposure to global demand (particularly the US and China) and the fact they’ve been set at the lowest level of just 10%. However, investors appear to be punishing the Pound due to its high-risk status and elevated interest rates, which would allow some room for aggressive rate cuts if the Bank of England ever pressed the panic button on the growth outlook.

As a result, the GBP/USD has fallen nearly 5-cents from last Thursday’s high and now trades around a 1-mth low. The GBP/EUR has fallen 3.5-cents since the tariffs announcement and trades around the lowest levels since August. The EUR/USD has swung wildly and is currently trading 2-cents down from last Thursday’s high and around a cent higher from pre-tariff announcement levels.

Markets are extremely sensitive to any tariff news and currencies will likely remain very volatile as further headlines come in on any retaliatory measures and the state of negotiations.   

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