Foreign Exchange Analysis - 29th July 2025

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GB Pound

What happened last week?

The Pound fell on Thursday and Friday and closed the week down 0.5%. This was driven, in part, by news of the UK borrowing rise to £20.7bn.

What to watch for in the short-term?

The combination of weaker PMIs and a deteriorating labour market show that there is some stagflationary pressure in the UK. Ray Dalio, is the latest investor to warn the UK of the growing 'debt doom loop' with UK debt now 101% of GDP. There is a quiet couple of weeks upcoming in the UK on the data front. If data over the pond is is dollar-positive, we could see the Pound give back some of the gains from 1H25.

What about the coming months?

A key theme over the coming months is the pricing in of a UK fiscal risk premium. This has been seen in the steepening term premium and the long-end of the yield curve which, despite considerable volatility, has risen 30bps YTD. This fiscal risk premium has started to make its way into the currency and could continue to exert downward pressure on Sterling over the coming quarters as investors look to the Chancellor for a solution to the UK's weakening economy.

US Dollar

What happened last week?

The big news that came out over the weekend is the signing of the trade deal between the US and the EU. The agreement includes a 15% tariff on EU goods with a few notable exceptions such as steel which will remain at 50%. The end of the negotiations has given a bounce to equity markets on both sides of the Atlantic but has favoured the Dollar on the FX front. This is because the market seems to see the US as the winning party with the Greenback rising nearly 1% in Mondays session.

What to watch for in the short-term?

There is a packed week for data this week including an FOMC announcement on Wednesday, along with JOLTs on Tuesday, Core PCE on Thursday and NFPs on Friday. Considering the thinner summer market depth, this could lead to increased volatility in the short-term. The market is expecting a hold by the Fed so all eyes will be on Powell's commentary. A hawkish Chair and hotter-than-expected Core PCE could provide support for the Dollar,

What about the coming months?

Markets are still pricing in two rate cuts for the year but this is looking increasingly unlikely as the labour market remains strong and inflation is, at best flattening. This should be dollar-positive but the 3-month and 1 year risk-reversals tell an alternate Euro bullish story. Calendar Tuesday 3pm | JOLTs Wednesday 7pm | FOMC decision Thursday 1.30pm | Core PCE Index Friday 1.30pm | Non-Farm Payrolls

Euro

What happened last week?

EUR/GBP continued its strong gains and is up 5% YTD, gaining 1.6% over the previous 5 days. That being said, at least half of these gains have been given back as the Euro fell off the back of the trade deal announcement. This seems more like a temporary blip rather than a changing of structural narratives. There was no coherent dovish or hawkish narrative from the ECB in their July meeting. As such the market is pricing in one more cut but it is not sure when.

What to watch for in the short-term?

There has been a widening of the rate differential between the pair. This hasn't negatively affected EURGBP as you would typically expect. It instead shows the predilection that investors feel towards the Eurozone and the bearish UK sentiment. This was backed up by positive numbers in EU PMIs and weaker UK PMIs. There is both inflation and GDP numbers to come this week with forecasts at 1.9% YoY and 1.2% YoY respectively.

What about the coming months?

There are still concerns about prolonged Euro strength and the impact that this could have for its economy. Lagarde explicitly mentioned that they are not targeting an exchange rate but are keeping a keen eye on its strength. Calendar Wednesday 10am | GDP growth Friday 10am | Inflation Rate

Calendar

Thursday 1.15pm | ECB decision

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