ACM Update 04-08-25

You’re fired!!! The Federal Reserve opted to keep interest rates on hold last week, whilst US jobs data fell short of expectations leading to finger-pointing and a sacking from Trump. As the 1st August tariff deadline finally arrived, many countries scrabbled to land last minute trade deals with the US. Amidst all the economic uncertainty, US GDP for Q2 produced a 3.0% gain. 

This week brings the turn of the Bank of England to set interest rates, where a 25-basis point cut is expected. The fallout from the White House undermining Friday’s jobs data, will be crucial for the prospects of the Dollar.

The 1st August was already a date where all focus would be on the US, with the tariff deadline finally arriving. Many countries saw last minute changes to trade levies, both through negotiations, but also political decisions in the case of Canada. But Friday saw all eyes on the US for many other reasons too. More on that to come….

There were plenty of discussion points from US data last week, starting off with Wednesday evening’s interest rate announcement from the Federal Reserve. Despite the heated debate recently between the Fed Chair and President Trump, interest rates were kept on hold, as widely expected. The Fed simply doesn’t have enough confidence in the economic landscape currently, to justify a rate cut.

However, the decision wasn’t unanimous. Two members (both Trump appointees it should be noted) voted for a cut, in the first “double dissent” on the committee since 1993. The remaining members, including Chairman Powell, had the majority to keep things as they are for now, until the September meeting. Powell commented that they were close to seeing cuts, but not quite yet, noting that there were still “many uncertainties left to resolve”.

US Advance GDP data, the earliest reading available for Q2, showed a larger than expected rise of 3.0% (annualised), bouncing back from the -0.3% contraction in Q1. This means economic growth averaged 1.25% in the first half of the year, still a full 1% down on the same period last year.

Many economists felt that this masked the actual health of the US economy, given personal spending, business investment and imports are all well down. But that didn’t stop Trump declaring it “WAY BETTER THAN EXPECTED” and time to cut interest rates. To add fuel to his fire, Core PCE inflation remained flat last month.

Onto the raft of jobs data then, which was also published last week. The number of job openings in the JOLTS jobs data dropped quite sharply, down by some 300,000 vacancies compared to the month before.

Up until Friday lunchtime though, the Dollar had enjoyed a buoyant week. After an EU-US trade deal was agreed on Monday, the Euro weakened off considerably, which saw the US currency as a major benefactor. But the 2.5% plus gains made during the week were partly wiped out by a much weaker than expected set of payrolls data, after just 73,000 jobs were added to the US economy in July. Unemployment also nudged up slightly.

This saw the Dollar weaken sharply, as concerns about the ongoing state of the US economy resurfaced. But it was the White House meddling in the data released, that caused most alarm, as President Trump decided the figures were to blame and not his policies. He claimed these were “RIGGED jobs figures to make the Republicans and ME, look bad” and thus decided to sack the head of the body that publishes the data.

Erika McEntarfer, commissioner of the Bureau of Labour Statistics, was removed from her post in a move that risks destroying public trust in the bodies that publish data. Whilst the poor data weakened the Dollar, the sacking also led to further weakness. The lingering impact of Trump’s decision could well have a negative impact on Dollar fortunes ongoing, as well as leading to questions about the integrity of US data.

The BLS also revised down the May & June figures too, as many US economists called the jobs data a pivotal moment for Trump’s tariffs. The last three months marked the worst three months for US jobs creation since the pandemic in 2020. The jobs market falling off quickly is likely to now lead to further concerns about the economy, let alone the prospect of interest rate cuts to come.

The big moves on GBP-USD last week can be seen below:

In complete contrast, UK economic data was limited last week. Monday morning saw the latest mortgage approvals data, which showed a slight increase to 64,000 in June, as the housing market continues to recover from tax changes in April. House prices themselves were recorded up by 0.6% in July by lender Nationwide, not quite erasing the 0.8% drop the month prior.

The only other release was the July manufacturing data, which showed output falling at a slower pace than in Q2. Business optimism meanwhile bounced back to a five-month high in the sector. All UK eyes this week will be on Thursday’s Bank of England meeting.

After the positive delivery of a trade deal with the US last week from Ursula von der Leyen, the news was met with negativity from both politicians and currency markets. Both the German Chancellor and French Prime Minister both believe the deal to be damaging, and stated it felt like a submission on the part of EU negotiators.

In fact, most countries across the union were downbeat, but some saw the deal as necessary to avoid a larger more expensive trade war. The European Union remains the biggest source of US imports at just over 20% and $303 billion. The Euro lost some 3% during the week versus the Dollar, until Friday lunchtime’s reversal.

On a positive note, Eurozone inflation remained constant and on target at 2.0% in July, according to the Flash Estimate. With a trade deal providing some stability, one can expect inflation to bounce along close to this level over the coming months, barring any unexpected surprises. That said, some nations did see an uptick, such as Spain at 2.7% for the month.

Other Eurozone releases included some pieces of French and German data. The former saw Manufacturing orders fall at their sharpest pace since January, whilst the pace of inflation slowed slightly. GDP meanwhile was indicated as a 0.3% growth for Q2, above the 0.1% forecast.

German data showed a bounce back in retail sales in June, whilst inflation accelerated slightly in July. Unemployment rose at its slowest rate in 18 months, but nervousness remains about how the US trade deal will impact the nation’s car industry, with the sector forming a large part of economic output.

After the weaker US jobs data on Friday, the Euro gained ground across the board, including versus GBP as illustrated in the chart below:

The week ahead:

Monday – CANADA BANK HOLIDAY

Tuesday – EU/UK/US Services PMI (08:15-14:45), 

Wednesday – EU Retail Sales (10:00), Fed Daly speech (17:45) Fed Collins & Cook speeches (19:00)

Thursday – ECB Economic Bulletin (09:00), Bank of England rate announcement (12:00), US Unemployment Claims (13:30)

Friday – BoE Pill speech (12:15)

After a packed week of US data, it is a more sedate affair this week across the board. The main release comes on Thursday lunchtime, where the Bank of England meeting takes place on Threadneedle Street. This is expected to see the Bank continue their slow and gradual pace of interest rate cuts, with their second 0.25% rate cut of the year.

The move has been firmly priced in by markets, so it will likely just be any forward guidance from Andrew Bailey that will make an impact. An 8-1 decision split is projected currently in favour of the cut.

Donald Trump will also be required to make a couple of key appointments this week. In addition to replacing the head of the Bureau of Labour Statistics, one member of the Fed rate-setting committee is to step down this month. Adriana Kugler’s resignation the President the chance to appoint someone more aligned to his desire to cut interest rates. Another vote in his favour….

The independence of the Fed will therefore be further called into question, as will the prospects of interest rates remaining higher for longer. After Friday’s weaker jobs data, the chances of a September rate cut have more than doubled to circa 60%, according to many market analysts.

For the above reasons, despite a lack of data the Dollar is likely to therefore remain a focal point this week, with the exception of Thursday lunchtime. Despite the gains last week, the Dollar starts this week on the back foot, along with the Swiss Franc which has faced headwinds after a last-minute 39% tariff was slapped on the nation.

For clients involved in Dollar conversions, make sure to reach out to the team to discuss strategies.

Have a great week.