Sterling strengthens against the dollar and the euro and US policymakers eye interest rate cuts.
Market Recap:
It was a good week for the pound, which hit its highest level against the dollar since early July. That was after UK GDP exceeded expectations and grew by 0.3% last month, putting annual growth at 1.2%. There was also better employment news, with UK payrolls dropping 8,000 in July compared to an expected 20,000.
Has the UK economy turned a corner? It’s way too early to tell. But the pound has also had a better month against the euro, gaining 0.44%, though it remains down nearly 1.4% over the past year.
These exchange rate fluctuations came against the backdrop of a quieter week in money markets. President Trump announced a further 90-day delay to sweeping tariffs on Chinese imports on Monday, allaying market fears of a return to trade war conditions.
Interest rates on the cusp?
What will happen to interest rates? It’s a crucial question because rates drive exchange rate fluctuations. The US Federal Reserve (Fed) held rates steady at 4.25%-4.50% in July, despite considerable pressure from the White House for cuts. But according to a Reuters poll, a majority of economists are now factoring in a 25 basis point cut in September, and perhaps another by the end of the year.
Meanwhile, the European Central Bank (ECB) ended its latest easing cycle in July with borrowing costs at a three-year-low of 2.15%. But even here, some investors see the possibility of a further cut this year as the ECB attempts to boost a sluggish eurozone economy.
Coming Up:
Money market focus this week will be on the Fed’s Jackson Hole Symposium. Traders will be looking for clues in speeches by major Fed figures, including Chairman Powell, on the likelihood of interest rate cuts.
Important data this week includes inflation figures in the UK and EU (due Wednesday) and S&P PMIs (measures of confidence based on monthly surveys of business leaders) in the US, eurozone and UK (Thursday).
