Currencies traded in fairly tight ranges throughout most of last week, shortened by the US 4th of July holiday. Yet the dollar retreated after Thursday's nonfarm payrolls number came out somewhat softer than anticipated, which suggested that the Fed may be wise in adopting a cautious stance to monetary policy tightening. Indeed, calls for hikes have eased more broadly amid better than expected inflation numbers. While everyone expects the next moves in G10 interest rates to be higher, it is no longer clear who will be first; no full hikes are priced in for the US, the Eurozone or the UK until very late in 2026 at the earliest.
The calendar is light in terms of macroeconomic news or policy announcements this week. In this context, markets will find it hard to shake off the summer torpor, so large currency moves are not foreseen. Investors are no longer paying particularly close attention to the US-Iran negotiations, and the oil market appears to price in almost no chance of a reprise of hostilities. Perhaps the most important event this week will be the release of the minutes of June's Federal Reserve meeting on Wednesday, the first one held under Kevin Warsh's chairmanship.
GBP
In a quiet week, market focus was on the likely successor to Keir Starmer as prime minister, Andy Burnham. Sterling was buoyed by his insistence that he intends to maintain the fiscal rules and reports that his advisors are not seeking additional taxation, though it remains unclear how he intends to fund his social and infrastructure spending priorities. Ed Miliband is now the clear favourite to be named the new chancellor. While his preference for fiscal expansion is a red flag for UK assets, the limited headroom means that realistically the hands will be tied for any occupant of Number 11.
Bank of England Governor Bailey sounded a dovish note at the Sintra central bankers conference, which helped push market expectations of the first hike all the way to 2027. We have been saying for months that market pricing for higher UK rates was excessive, and this merely cements this view. Sterling outperformance relative to the euro continues and the pound has broken the tight range that it held in this pair throughout 2026.
EUR
The Eurozone flash inflation report for June contained some good news for the ECB. Both the headline and the core index dropped further than expected, with the latter now not all that far away from the 2% target. The ECB officials that spoke at the Sintra conference last week were largely noncommittal, suggesting that the central bank is keeping its options open and will react to incoming data. However, markets are already pushing the first hike into the future, and see no more than a 50% chance of a move in September.
Now that central banks appear to be in a wait-and-see mode, the rate differential across the Atlantic seems to be stabilising, and we think that the common currency has found solid support around the recent lows against the dollar. This is supporting our call for a gradual appreciation in the euro versus the dollar over our forecast horizon.
USD
The June payrolls report came out a bit soft, but it follows two rather strong numbers in the previous two months, and the pace of job creation continues to comfortably outstrip the pace of growth in the US labour force. These surveys have also become less reliable lately, so we recommend looking at the three-month running average rather than overreacting to the monthly headline. The trend continues to be positive, and the jobs market is still rebounding from its late 2025 slowdown, with little sign that the Iran war uncertainty has led to mass layoffs or widespread hiring freezes.
The US economy continues to expand at a decent rate of around 2.0%. Putting this together with recent monthly core inflation prints in the range of 3-4% annualised, the question for hikes seems to be one of when, not if. Yet the Fed has clearly emphasised that its focus is on inflation, and unless and until we see clearer signs that the energy spike has filtered its way through to underlying price pressures, we think that the Fed will opt for a cautious approach to tightening.
CNY
USD/CNY trended downwards last week amid the broad move lower in the greenback. The focus was on the June PMI data: both the official and RatingDog gauges showed little change from May. The official index edged up marginally, though the composite still hovers just above the 50 mark, and the details are not especially encouraging.
The RatingDog data pointed to stronger, robust activity (particularly in services), even as its indices registered a small dip from May. This week, attention will turn to June inflation data, out on Thursday, which should continue to point to muted consumer price pressures.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- G10 FX Outlook - July 2026
- FX Talk: Keir out, Burnham in - what happens to the pound?
