ACM Update 08-09-25
The sobering US economic news continued last week courtesy of August’s Non-Farm Payrolls data which was released on Friday. This produced the fewest number of jobs added in ten months, as trade fears continue. Donald Trump meanwhile is off to the Supreme Court to fight for his tariffs.
UK news was dominated by the ins and outs of Downing Street, as well as an early week spike in Government borrowing costs to the highest since 1998. This caused Sterling-Dollar to have its worst day since 2023.
The coming week brings the latest on UK growth, US inflation and the ECB’s September policy decision. Lagarde and Co are widely expected to stay put with Eurozone interest rates again.
September started with a real week of drama both politically and economically, as markets returned from the quieter August lull. Politically speaking, a “first Monday back” cabinet reshuffle caught markets by surprise, which was followed by UK Government borrowing costs hitting their highest in 27 years on Tuesday morning. The 30-year gilt yield went even higher than the Truss-Kwarteng meltdown of September 2022, as Keir Starmer launched “Phase Two”.
This took considerable value off GBP versus all majors on Tuesday morning, resulting in the largest daily drop for GBP-USD since 2023. The pair lost 1.5% at one stage in the day, as pressure grew on Chancellor Reeves over the fiscal black hole.
Given the rising costs of Government borrowing, there are also rising expectations for tax rises to come in the UK Budget, which Reeves revealed on Wednesday will take place on 26th November. She promised a “tight grip” on UK finances but denied the UK economy is “broken”. Both British inflation and borrowing costs are now the highest of the G7 nations.
Further political instability played out during the week over Deputy PM, Angela Rayner. It emerged that she had failed to pay the correct stamp duty on a property purchase and after referring herself to parliamentary ethics advisers, was promptly confirmed as having broken the ministerial code. Cue her resignation, a second Cabinet reshuffle of the week and another dent in public confidence.
In better Friday announcements…. UK retail sales figures for July were published. These showed a 0.6% uptick, ahead of expectations. Spending was boosted by good weather and the women’s European football tournament taking place in the month. The three months to July still recorded a drop of 0.6%, with spending having fallen since March. The ONS (Office for National Statistics) had delayed the release by two weeks, over concerns about data quality.
Overall, sterling had a tough week. Movements on GBP-USD can be seen in the chart below, with the drop in the first part of the week very evident:
News out of the US was just as negative for those in charge. As tariff uncertainty rages on, President Trump has now requested the Supreme Court make a decision to overturn the declaration his tariffs are illegal. This will dictate whether his implemented policies were indeed within his mandate, as an “economic emergency”.
US manufacturing activity is already feeling the pinch of tariffs. In August the reading shrank for the sixth straight month, as production slows due to higher import duties on raw materials coming into the country.
Being the first week of a new month, the latest round of jobs data was published which made for further terrible reading for the President. US job openings fell in July to their lowest in ten months, where the figure dropped to 7.18m vacancies, having been forecast at 7.38m. Note that these figures came from the same set of data that led to Trump firing the head of the Bureau of Labor Statistics, a month ago.
Wednesday’s Beige Book release of data for US monetary policy makers, also reported “flat to declining consumer spending” across the country. This was cited as due to wage growth increasing less quickly than price inflation, primarily due to tariffs.
But on Friday, the culmination of the jobs data saw a major undershoot in the Non-Farm Payrolls figure. US employers added just 22,000 jobs to the economy in August, well short of the estimate. The move led to even higher chances of a US rate cut on 17th September, which markets now feel is almost a certainty. The ongoing weak data and likelihood of a rate cut saw the Dollar drop by 0.8% after the NFP release, although it recovered some ground before the close.
Ahead of the looming Fed meeting, Trump is doing his best to fill seats with his own nominations. Lisa Cook is now the focus of a criminal investigation into her alleged mortgage fraud. Meanwhile Trump has also been pushing through his Economic Adviser, Stephen Miran, to act as one of the Fed voting members. This comes as Miran intends to keep his White House role, whilst serving at the independent Federal Reserve.
The Republican-weighted Senate Banking Committee must decide on Miran’s appointment, which is likely to happen promptly before the next Fed meeting. The irony being that an interest rate cut is likely now required, purely due to how Trump’s tariffs have been strangling the economy. He will get his desired outcome, but primarily due to the damage from his policies.
It was a tough week for the Dollar overall, as market nerves continued and US Government debt also showed the same signs of nerves as in the UK.
European markets were not immune to the bond market movements either. Although slightly calmer than the movements in the UK and US, prices still moved higher in the early part of the week. In better news, Monday also saw a slight improvement in Eurozone manufacturing figures, as factory output figures moved to a 41-month high in August. These continue to bounce back after recent dents from tariff nerves.
Inflation in the Eurozone remains in a good position, despite a minor uptick in August. The early Flash estimate showed a 2.1% reading for the month, whilst retail sales for July showed a slight drop of -0.5%.
Growth for Q2 in the bloc was confirmed as a sluggish 0.1% increase. Finland, Germany and Italy all recorded a negative figure for the period, seeing -0.4%, -0.3% and -0.1% respectively. At the other end of the scale, Croatia and Spain were the top single currency performers with 1.2% and 0.7% worth of expansion.
According to a Bloomberg survey published last week, the ECB are now done with cutting interest rates. Most economists surveyed expect the central bank to keep interest rates at 2% until the end of 2026, with inflation likely to remain on track at the 2% target also. A minority had concerns about inflation falling too far though, so left the door open for a 0.25% rate cut in this scenario.
Sterling-Euro last week was broadly dominated by UK events, thus beyond the bond market nerves in the first part of the week, the pair remained relatively stable. Movements can be seen below:
The week ahead:
Monday – EU Sentix Investor Confidence (09:30)
Tuesday – BRC Retail Sales Monitor (00:01), ECB Nagel speech (12:30)
Wednesday – US PPI inflation (13:30)
Thursday – ECB rate announcement (13:15), US CPI inflation (13:30), ECB Press Conference (13:45), US Federal Budget Balance (19:00)
Friday – UK GDP (07:00), ECB Nagel speech (09:15), US UoM Consumer Sentiment & Inflation Expectations (15:00)
After the summer break we now head into the latest round of interest rate meetings. The European Central Bank take the stage this Thursday, with the Federal Reserve and Bank of England deciding next week. Given the recent stability around Eurozone interest rates, we expect that to continue in this week’s ECB meeting. Growth remains their major obstacle, so ECB projections in the that in the Lagarde press conference will be important.
News over the weekend about another (likely) change of Prime Minister in France is unlikely to help the fortunes of the Euro. Francois Bayrou called a vote of no confidence on himself, with the aim of forcing politicians into an effective way forwards.
UK news will be two-fold. Politically, the fallout from last week’s double cabinet reshuffle is likely to rumble on. Prime Minister’s question time on Wednesday in the House of Commons could well be entertaining. Economically, Friday morning’s GDP release is the most significant. June’s 0.4% growth is expected to be backed up with 0.0% in July. More bad news for Starmer and Reeves in their pursuit of economic growth.
And in the US…. the fallout from Friday’s jobs data is going to be crucial. The question now seems to not be whether US interest rates will come down in next Wednesday, but if there is a chance of a larger rate cut. Given how Trump is rapidly filling the Fed committee with his own team, anything is possible.
With interest rate meetings from the big three central banks over the next ten days, we are likely to see plenty of movement. Political, geopolitical and economic factors are all very much at play, so make sure to get in touch with the team and we can discuss different approaches for managing currency risk.
Have a great week.
