Foreign Exchange Analysis - 22nd July 2025

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GB Pound

What happened last week?

Following a poor month for Sterling, Cable traded higher last week, eventually gaining 60bp. The start of the Sterling rally was helped by a large upward revision to May jobs data to -24k (originally -109k). This gradual softening of the UK labour market was accompanied by sticky inflation at 3.6% which was driven by higher services inflation. This has brought cut expectations down from 94% to 88% for August, helping the Pound.

What to watch for in the short-term?

As the markets are a little thin during the summer, we expect much of the price action to be positioning-led. That being said, there is still PMI data coming on Thursday which will shed some light on the state of the UK economy.

What about the coming months?

As wage pressures begin to slow, sticky services inflation is likely to recede going into Q4 which should help the BoE on it's monetary loosening path. Currently the market prices two more cuts before year end. We continue to watch the effect of fiscal policy on Sterling as it looks there is a risk premium priced in to the currency which has the potential to take Sterling lower.

Calendar

Thursday 9.30am | Services & Manufacturing PMI

US Dollar

What happened last week?

This week, the dollar had its second week of gains against the EUR. We had US CPI which came in at 2.7% YoY (0.1% higher than expected) and is evidence of the inflationary effect of tariffs. This was confirmed further by the underlying data. Services inflation is typically lower in the summer and this continued this year. Due to the makeup of the 'goods basket', this deflated the overall CPI number. However, there is evidence of price rises occurring in the consumer goods space (e.g. household furnishings up 1% in June) and if this continues, the Fed will have a tricky decision on their hands.

What to watch for in the short-term?

We are entering the quiet period as the Fed prepares for its decision that is coming at the end of the month. In this period, we could see Chair Powell come under considerable scrutiny from the President. As markets continue to show distain for a politicised Fed, we could see increased volatility as we saw last Wednesday (16th).

What about the coming months?

Markets are split whether inflationary tariffs will lead to a higher for longer rate path or downward pressure on economic growth which ultimately forces the Fed to loosen monetary policy. If inflation does continue to trend higher over the coming months, and this coincides with a hawkish Fed, we would expect this to provide a support for the Dollar over the Medium-term. Moreover, resilience in the labour market and consumer spending could provide support this thesis.

Euro

What happened last week?

EUR/GBP hit its highest level since January 2024 on Monday but re-traced most of these gains and ended up closing the week flat. This followed the revisions to the UK job market data which provided some support in the short-term. This coincided with some internal disagreement around the EU's most recent budget which weighed on the Euro.

What to watch for in the short-term?

The main event of this week is the ECB interest rate decision on Wednesday. It is unlikely that this will be a big mover for the currency as there is no rate cut priced in and comments from the Board suggested that they are taking a 'wait-and-see' approach to H2 2025 especially as negotiations between the US and the EU continue over the tariff rate. The Pound, since April, has reacted badly to increased tariffs.

What about the coming months?

A well-placed ECB and a tentative BoE combined with a deteriorating UK labour market, sticky inflation, poor growth, and fiscal risk mean that there is a backdrop for Pound weakness over the coming months. Alongside this, there is still positive sentiment surrounding the German economy which is providing support to the Euro against the Pound.

Calendar

Thursday 1.15pm | ECB decision

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