Market Recap:
Eurozone leaders are hoping for a tariff deal with the US, while markets digest contrasting economic data.
Markets eye tariff talks as deadline looms:
As the 1 August deadline approaches, markets will be focusing on any sign of agreement between the US and key trading partners like the EU and Mexico.
Both partners face an import tariff rate of 30% if a deal can’t be reached. Markets remain optimistic, but a failure to reach agreements could drive considerable forex volatility as investors seek out safe haven assets.
Worries around US tariffs, coupled with rising consumer confidence in the States, pushed the euro to a four-week low against the dollar last week. The pound also fell against the greenback, in this case to a near eight-week low.
Mixed economic data clouds UK interest rate forecast:
Those looking for clues about the speed and direction of interest rate policy received mixed signals from the UK last week, with figures showing both unemployment and inflation rising in June.
The jump to 3.6% inflation, against an expected 3.4%, took markets by surprise. While investors are still pricing in further interest rate cuts this year, the confusing economic picture has drained some confidence from those predictions.
By contrast, confidence is high that the European Central Bank (ECB) will hold interest rates steady at its meeting this week. Eurozone year-on-year inflation was 2% in June.
In the US, President Trump again criticised the Federal Reserve (Fed) for cutting interest rates too slowly. Despite that, policymakers are likely to keep rates steady in the 4.25%-4.50% range at the end of July to counter inflationary pressure.
How could this effect your business?
Tariff threats often drive investors toward safe-haven currencies, causing volatility in major pairs like GBP/USD, GBP/EUR, and EUR/USD. In times of heightened trade tension, the USD and EUR typically strengthen as investors reduce exposure to risk, while the GBP, more sensitive to global sentiment and domestic politics, may weaken.
Lower interest rates tend to weigh on a currency by reducing investor returns. If the Bank of England cuts rates while the ECB or Fed holds steady, GBP could weaken against both EUR and USD. Similarly, if the ECB lowers rates more aggressively than the Fed, EUR/USD may fall.
Coming Up:
As well as trade talk progress, investors will be looking at financial results from a swathe of major US companies this week, including Alphabet, Tesla and IBM.
In Europe, the ECB’s monetary policy decision, due Thursday, is the most significant announcement. Flash PMIs – snapshot measures of business confidence – are also expected for Germany, France and the UK.
