Sterling snapped a three-week winning run last week, slipping around 1% against the US dollar and losing ground against the euro for four consecutive sessions. Softer June inflation prompted investors to scale back expectations of further Bank of England tightening, while political developments added fresh uncertainty. The new government’s first week saw gilt yields fluctuate, the surprise appointment of John Healey as Chancellor and renewed debate over how proposed tax cuts would be funded. Stronger employment and retail sales data provided some support but were not enough to reverse the shift in market sentiment.
Elsewhere, the European Central Bank left interest rates unchanged but maintained a hawkish tone, signalling that a September rate increase remains a possibility. President Lagarde highlighted the importance of incoming inflation data and the continued influence of energy prices, with oil trading near multi-month highs as tensions in the Gulf persisted. In the US, further tariff announcements added another layer of uncertainty for global markets.
This week now brings one of the busiest economic calendars of the summer. Interest rate decisions from both the Federal Reserve and the Bank of England are expected to dominate trading, while US GDP, Core PCE inflation, and preliminary eurozone GDP and inflation figures will provide further clues on the direction of monetary policy through the remainder of the year.
Federal Reserve
The Federal Reserve is widely expected to leave interest rates unchanged on Wednesday. Markets will instead focus on Chair Kevin Warsh’s commentary and any guidance on the timing of future policy moves. Investors will be looking for clues as to whether policymakers remain concerned about inflation or are becoming more comfortable with the current outlook. Any shift in tone could have an immediate impact on the US dollar.
Bank of England
Attention then turns to Thursday’s Bank of England decision. While no change in rates is expected, the accompanying Monetary Policy Report and voting split are likely to be scrutinised for signals on future policy. Following softer inflation data earlier this month, markets have reduced expectations for further tightening, making any hawkish surprise supportive for sterling.
US growth and inflation
Thursday’s advance estimate of second-quarter GDP will provide the latest reading on the strength of the US economy, while Friday’s Core PCE Price Index, the Federal Reserve’s preferred inflation measure, could influence expectations for future interest rate decisions. Together, these releases are expected to generate further volatility across the major currency pairs.
Eurozone outlook
The eurozone will publish preliminary second-quarter GDP on Thursday, followed by July’s Flash CPI inflation reading on Friday. These releases will help shape expectations for the ECB’s September meeting and determine whether policymakers retain their tightening bias.
The week ahead
Monday 27 July
- US Durable Goods Orders
Wednesday 29 July
- Federal Reserve interest rate decision
Thursday 30 July
- Bank of England interest rate decision and Monetary Policy Report
- US Q2 GDP (Advance)
- Eurozone Q2 GDP (Preliminary)
Friday 31 July
- Eurozone Flash CPI
- US Core PCE Price Index
With two major central bank decisions and several high-impact economic releases taking place within a matter of days, businesses with upcoming foreign exchange requirements should consider reviewing their hedging strategy or speaking to their account manager about managing currency risk during what could be a volatile week for markets.
