Foreign Exchange Analysis - 1st July 2025

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GB Pound

What happened last week?

The Pound had a good week against the Greenback and continues its strong year. As it reached 1.37, it was the highest Sterling has been against the Dollar since 2021. This is predominantly being being driven by Dollar weakness. The evidence for this lies in the Dollars poor performance against the Euro and flat performance against the Yen.

What to watch for in the short-term?

Technical analysts are bullish on the Pound and could help continue its drive up towards 1.40, however, the extent to which this rally can last will depend on Britain's fiscal position. Investors question the governments ability to give themselves the requisite headroom for spending amid large defence announcements and a growing rebellion over welfare reform

What about the coming months?

 A key feature of the many BoE speeches that we heard last week was employment. It seems the cooling has been brought on by the rises in NI contributions that businesses face, increased minimum wages, and other price pressures. If this does show up in the data, then there could be a rate cut coming sooner than originally anticipated.

US Dollar

What happened last week?

It was another bad week for the dollar as it fell another c.1.5% against a basket of currencies. This rounded out the worst start to a year for the Dollar since the collapse of the Bretton Woods system. This has happened as a result of Trump's spending bill and on the back of his comments about Fed Chair Powell. Trump has stated that he wants rates between 1-2% and and hinted at replacing the current Fed chair for holding rates in a restrictive territory.

What to watch for in the short-term?

This will likely be a volatile week for the dollar. First, we have jobs data coming out of the US on Thursday along with the One Big Beautiful Bill which will probably be voted on in the Senate before markets close for July 4th. The jobs data needs watching closely because if NFPs worsen then the Fed could be caught between its dual mandate of full employment and low inflation.

What about the coming months?

With core goods CPI, ticking up last month, we could start to see upward pressure on inflation in H2. If this continues to happen, the Fed could hold rates in September (which is contrary to market consensus), which should provide some support for the Dollar. However, if equity markets continue to rise, PMs will have to hedge their FX exposure to capture these gains which could cause further downward pressure on the Dollar.

Calendar

Tuesday 15.00 ⏐ Manufacturing PMI

Thursday13.30 ⏐ Non Farm Payrolls

Euro

What happened last week?

The Euro has rallied for a 7th straight session against the dollar and has broke 1.18. This has caused some analysts to revise their expectations up and forecast the pair to pass $1.20 in the near term. This is off the back of solid inflation numbers in Germany (2%) and the Euro continuing to be the principal winner of the Dollar's slump.

What to watch for in the short-term?

While there is a considerably bullish sentiment that surrounds the Euro, it is worth questioning whether there is a catalyst that will continue to support the Euro's ascent. Over the coming week, there is an ECB conference in Sintra along with inflation data. Neither should cause major surprises but should provide us with a strong platform to understand how the EU, and the Euro, will fare as we move into the second half of 2025.

What about the coming months?

There is a strong correlation between Eurozone inflation and the Oil price. WTI, despite the volatility, has actually fallen YTD. From a risk management perspective, it is worth keeping an eye on how the ceasefire, and its subsequent effects, on the Oil price plays out to get an understanding of the ECB's future decision-making. That being said, with rates and inflation at 2%, the ECB feel very confident with their position and are well-placed to navigate these challenges.

Calendar

Tuesday 10.00⏐ Inflation Rate

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