Inflationary pressure in the UK and US may impact exchange rates this week
Market Recap:
Tariffs remain on the agenda this week as the 90-day pause in trade hostilities between the US and China comes to an end (Tuesday). Businesses and investors will be hoping for an agreement to extend the pause; if not tariffs of 100% and more could be imposed. Talks are being held, but a failure to agree to a further delay could drive money market volatility as traders seek safe haven assets.
Fears over the impact of tariffs saw the euro lose value against the dollar last week, though it remains up over 6.5% on the greenback in the last 12 months. Conversely, the pound strengthened slightly against the dollar after the Bank of England (BoE) announced a quarter point cut in interest rates. The pound also edged upwards against the euro, but remains over 0.25% down in the last month, thanks to doubts over the health of the UK economy.
Inflation fears return:
The BoE interest rate cut was widely expected, but the vote in the end was a close run thing. UK policymakers are concerned about economic performance but also about inflation, with the BoE raising its inflation forecast for September from 3.7% to 4%. Stubborn inflationary pressures are reducing expectations of further rate cuts this year.
In the US, too, headline inflation figures, due this week, are expected to show a rise to 2.8%, the highest level in five months. Fears are growing that President Trump’s tariff policy is translating into higher prices for US consumers.
By influencing interest rate decisions and overall economic performance, inflation is a key driver of exchange rate movements.
Coming Up:
US inflation figures – expected on Tuesday – are the key economic indicator this week. UK unemployment figures, a key indicator of underlying economic strength, are also due on Tuesday. Both UK and eurozone GDP figures are released on Thursday.
