Market Recap:
Despite President Trump’s decision to delay tariffs until the start of August, markets remained volatile amid unresolved US-EU trade tensions, fiscal uncertainty from his new bill, and UK political upheaval, with the euro holding steady, the dollar facing headwinds, and the pound initially falling before stabilising.
US-EU trade talks and Trump’s fiscal moves stir market uncertainty:
Markets have keenly watched trade talks between the US and EU this week, which have yet to produce a deal with just days before President Trump’s tariff agreement deadline.
If the two sides fail to reach an agreement by Wednesday, EU goods imported to the U.S. could be hit by duties of up to 50%, and retaliatory EU tariffs could follow soon afterward.
The signing of President Trump’s “Big Beautiful Bill” into law on Friday – a massive package of tax and spending cuts – has also increased fiscal uncertainty for the dollar.
Euro remains stable amid tariff tensions and positive EU economic indicators:
The strong euro held relatively steady against the dollar, despite tariff uncertainty.
Markets were stabilised by expectations that the ECB will not cut interest rates this month, EU inflation figures aligning with the ECB’s 2% forecast, and data from Germany seeing industrial production expand by 1.2% in May.
Pound dips after UK welfare U-turn, then recovers on service sector rebound:
The pound dropped to a two-week low against the dollar on Wednesday, and a ten-week low against the euro, after the UK government was forced to U-turn on its welfare bill and say goodbye to promised taxpayer savings of £4.5bn a year.
Initial market jitters over the Chancellor’s position soon receded, with the pound recovering some ground after data showed a modest rebound in UK service sector growth.
Coming Up:
All eyes will continue to be on the looming Wednesday tariff deadline. Short-term volatility is expected ahead, but markets have been here before and the US announcement that new tariffs will not actually take effect until 1 August, giving countries more time to negotiate deals, may help ease volatility.
The pound is widely predicted to remain under short-term pressure, while the outlook for the euro is generally bullish. Any trade deal announcements may boost the dollar temporarily, but the currency’s long-term weakness is expected to continue, amid rising expectations of deeper Federal Reserve rate cuts and mounting fiscal concerns over President Trump’s tax and spending cuts.
Minutes of the US Federal Reserve’s most recent Federal Open Market Committee (FOMA) meeting are due on Wednesday, which may offer hints about the bank’s upcoming interest rate decisions. Any strong suggestions will certainly affect the dollar. The UK’s GDP figures and manufacturing output for May will be released on Friday. Markets will be keenly watching any developments, following losses to the pound this week over Chancellor Rachel Reeves’ uncertain position.
