Sterling remains under pressure as UK economic data continues to disappoint.
Friday’s GDP figures showed a 0.1% contraction in May, missing expectations for modest growth (+0.1%) and following April’s 0.3% contraction. This has raised expectations that the Bank of England may be forced to cut rates further and markets are now pricing in around a 90% chance of a cut next month. The data also raises the risk of additional tax hikes in the autumn and keeps upward pressure on government borrowing costs (Gilt yields remaining elevated and cautiously monitored by markets). As a result, the Pound has continued to underperform against most of its major peers in the past week or so.
Traders will be keeping a close eye on the upcoming UK data releases to see if this pattern continues. This week sees the latest UK inflation report (Weds) and then (perhaps even more importantly) the latest UK jobs numbers (Thurs). There are growing signs that employers are reacting badly to the latest round of tax increases and therefore this release will come under even closer scrutiny than usual and should provide a clearer view of the extent of the weakness in UK economy.
In other news, Trump continues to threaten very high tariffs to start in August. Notably, markets appear to be generally taking these threats in their stride (we’ve been here before I guess) and appear relatively desensitised to events on that side. Only the US Treasury market continues to send ominous signals, where long-term yields are rising in response to the latest budget bill and ballooning deficit forecasts, but even this is so far orderly.
Overall, the USD has been steadily recovering from its more recent lows as the US data shows resilience and, so far, has (seemingly) not been hit too hard over Trump’s tariffs. Even feedthrough from the tariffs to inflation has been very limited so far, but this likely can’t last forever. Importers will eventually run out of the inventory they accumulated earlier in the year before the tariffs hit and prices should eventually adjust upwards (especially given strong consumer demand). All eyes will be on tomorrow’s US inflation report for clues on whether the Fed are right to keep interest rates on hold or yield to political pressure from Trump to cut rates.
Tuesday’s US inflation data will therefore draw a lot of attention and provide further clues on whether the Fed are right to keep interest rates on hold or whether they should be looking to cut rates as being pushed by President Trump.
As a result, the GBP/USD has lost around 3-cents since the start of July and trades around a 3-week low. The GBP/EUR has continued to slip lower and trades around a 3-mth low. The EUR/USD has steadily ticked lower to a 2.5-week low having lost around 1% this month.
