The currency market is so far taking in stride the barrage of tariff announcements and the developing narrative around a US economic slowdown.
Most currencies in the G10 ended the week higher on the dollar, notably the pound, which jumped after the Bank of England delivered the most hawkish rate cut imaginable. European currencies were buoyed by the news that Trump and Putin were planning to meet for the first time since the invasion of Ukraine on Friday. Latin American currencies also performed well, as investors focus on their cheap valuation and relative isolation from Trump’s tariffs.
The dollar is so far holding up relatively well in spite of clear signs of an economic slowdown and the general institutional degradation, most recently exemplified by the firing of the head of the Bureau of Labor Statistics for publishing a labour report that Trump didn’t like. It will be interesting to see whether this resiliency holds in the face of this week’s critical CPI report out Tuesday that is expected to show further upward pressure from the tariffs. In the UK, the labour market reports on Tuesday and second quarter GDP on Thursday will be in focus.
GBP
The pound provided the most interesting trading action in the G10 last week, as the Bank of England made clear to markets that it is more concerned with sticky inflation than the market had believed. Though the August meeting did result in a cut in rates, it took two votes to reach that outcome (the first time that has happened since the MPC was formed in 1997), and four of the nine members voted against any reduction in the base rate. All the while, the bank’s “gradual and careful” rate guidance was maintained, and the MPC also upped its forecasts for both inflation and growth in 2025.
The pound soared on the news as traders pushed back their expectations for the next cut into 2026. We expect further volatility in sterling this week, as critical data (labour market reports for June and July and second quarter GDP) will provide a fresh look at the extent of the UK economic slowdown. The outlook is definitely stagflationary for now, however.
EUR
The common currency is mostly staying out of the headlines for now, as the summer months traditionally go by in Europe without much economic or policy news. The economic backdrop in the Eurozone remains challenging, with PMIs indicating stagnation and a German manufacturing sector that has yet to show any substantial impact from the German fiscal package announced earlier in the year (we don’t expect this to be reflected until 2026).
The 15% tariffs agreed with the US remove the direst scenarios and should provide some certainty and clarity for businesses, but they also provide another headwind through what is set to be weaker external demand. All in all, we think that it will be challenging for the euro to rally much further from here. That said, the Trump-Putin meeting will be closely watched on Friday, and any positive news here could provide some modest upside.
USD
US economic data continues to give a strong whiff of stagflation, as the labour market slows down to a crawl (though without any sign of systematic layoffs), consumer demand grows sluggishly, but inflationary pressures remain elevated. Last week’s ISM business sentiment numbers reflect this, with the July numbers showing slow growth in orders but a soaring prices paid subindex, likely due to tariff pass through.
This week provides two critical checks for this narrative: inflation on Tuesday is expected to show stubborn upward pressure on the core subindex. Friday’s July retail sales report will also give us a timely read on the state of the engine of the US economy: consumer demand. All in all, the roughly two Federal Reserve cuts priced in for the rest of the year seems reasonable to us, but every inflation report takes on added importance given the large uncertainty over who will bear the cost of the tariffs: exporters, businesses or consumers.
