What happened in July?
Tariffs get real
July was the month when the tariff threat became the tariff reality. US President Donald Trump had been imposing, delaying and re-imposing trade levies since his “liberation day” announcement in April. In midsummer, some of the dust finally settled.
- After protracted negotiations, a trade deal was agreed between the EU and US.
- The deal imposes a 15% levy on most EU imports to the US.
- Many European leaders see the deal as capitulation to Washington.
Despite the EU/US deal – and a deal between the US and UK that had been agreed earlier – tariffs remain very much on the agenda, with Trump hitting 92 countries with new import rates on the last day of the month. Those most affected include India (25% tariff rate), Taiwan (20%) and South Africa (30%).
Sterling and the euro slide
The dollar had a good month against both the euro and the pound, buoyed by what was widely seen as a US-friendly EU trade deal. Investors returned to the safety of the greenback after concluding that the euro was overpriced.
- The dollar ended July around 3% up against the euro, its first monthly rise this year.
- The pound ended July at its weakest level against the dollar since mid May.
- The pound also lost ground against the euro in July, after disappointing data on the strength of the UK economy.
- The UK government will be hoping that its own slightly more favourable trade deal with the US – most UK imports are subject to a 10% tariff – will boost the economy and strengthen sterling in the weeks ahead.
Caution dominates interest rate decisions
Central bank policymakers walk a balancing act between trying to boost economies and keeping inflation within acceptable limits. A cautious approach dominated in July.
- Both the European Central Bank (ECB) and US Federal Reserve (Fed) opted to leave interest rates unchanged in July, at 2.15% and 4.25%-4.50% respectively.
- But concerns about the UK economy may persuade the Bank of England (BoE) to cut its 4.25% rate in August.
What to watch in August and beyond?
Markets will be closely following the fallout from Trump’s latest tariff round over the coming weeks. With 90 countries targeted, the tariffs could have a significant impact on the global economy, and money markets could move in response.
Plenty of uncertainty remains, not least where the US/China tariff rate will eventually settle. Investors will be watching for stress indicators in the US, where inflation has begun to tick upwards. Significant inflationary pressure could persuade the Fed to delay interest rate easing or even tighten monetary policy.
In Europe, investors will be looking to see if recent momentum can be maintained, and what the effect of the trade deal with the US may be. Exporters may be bracing for impact.
Will the dollar’s rally continue?
August is traditionally a quiet month, as the Northern Hemisphere contemplates summer holidays, but forex traders will watch the euro/dollar GBP/dollar pairings with interest.
While the dollar strengthened in July, the euro remains up over 6% over the last 12 months.
The EU/US trade deal was widely considered a win for Trump’s tariff policy, lifting the dollar, but the victory could be short-lived if consumer prices rise sharply in the US amid a cooling labour market. The shifting sands of transatlantic trade are likely to be reflected in exchange rate fluctuations in August and beyond.
Businesses with FX exposure should remain alert to impacts of currency volatility on costs and margins.
The pound in the firing line
With the dollar roaring back in the wake of President Trump’s perceived tariff success, the pound may slide further.
Sterling remains up over 3% against the dollar over the last year but the next few weeks are shrouded in uncertainty as traders mull the latest trade developments and the UK economy’s apparently shaky foundations. UK economic output unexpectedly shrank in July.
The euro is enjoying a positive run against the pound, strengthening over 5% in the year to date.
The pound is considered a riskier asset than the dollar and euro, and may lose appeal for investors if economic indicators continue to disappoint.
The takeaway?
The latest Trump tariffs may lead to unusually high levels of activity in August as traders seek safer assets. While the EU and UK have both made trade deals with Washington, their impact is yet to ripple through economies on both sides of the Atlantic. This may be the month when some of the dust settles and money markets adjust to a new era of elevated import duties.
