ACM Update 14-07-25
In the week that was meant to see the end of the 90-day tariff reprieve, Donald Trump opted to kick the can further down the road once more. His trade policies are certainly causing confusion for the Federal Reserve, whose latest minutes showed divisions over the pace of further rate cuts.
In the UK, the economy contracted again in May by -0.1%, capping off another disappointing week for the Chancellor. The EU meanwhile is once again facing a 30% tariff threat from Trump, but that didn’t seem to harm the single currency.
This week sees Eurogroup and G20 meetings, UK unemployment data, as well as the latest on UK, US and European inflation.
Amidst all the ongoing headwinds emanating from the White House, the US Dollar is recovering ground in July. With the 9th July deadline approaching, President Trump opted to once again defer his threatened tariffs until the beginning of August (at the earliest). The TACO (Trump Always Chickens Out) mentality is still very much alive and kicking in financial markets.
At the end of his 100th day in command, the President had suggested there were 200 completed trade deals ready to be announced. This was then followed by the “90 deals in 90 days” mantra. To date, he has only confirmed two with the UK and Vietnam.
Last week Trump shifted tact, by sending out letters that declare higher tariff levels whilst trade talks continue. These largely mirrored those on the now infamous “Liberation Day” flipboard.
With tariffs yet to be fully implemented, the Dollar recovered some ground thanks to the above and other factors. Economically, interest rates remain a focal point and the latest Federal Reserve meeting minutes were published last week. These displayed a unanimous decision to hold interest rates in June, but the ongoing path was far less clear.
Comments range from calls for “some reduction” in rates over the remainder of the year, to a couple of policymakers indicating a willingness to cut interest rates as soon as the 30th July meeting. Meanwhile another group of seven voters felt given the economic uncertainty, it would be beneficial to keep interest rates on hold for the rest of the year.
The overall concerns about the economy and a widespread discussion about current interest rates being close to the “neutral level” (neither boosting nor slowing the economy) led to Dollar strength. The prospect of interest rates remaining at their current level for longer was enough to satisfy investors overall and see the USD gain ground.
There are still members of the Fed committee calling for rate cuts in the July meeting though. Policymaker Christopher Waller was one of those last week, so this will be enough to keep markets on their toes at the end of the month.
Other Dollar data releases were sparse. In line with the other recent favourable jobs data, the weekly Unemployment Claims figures showed a drop to their lowest since late April. More good news for the jobs market, and another slight boost to the Dollar.
The chart for GBP-USD last week can be seen below, with the Dollar having gained roughly 1.4%:
On home shores, the news was dominated by more doom and gloom for the UK economy in May. The GDP data for UK PLC went against market expectations of a slight growth, to deliver a second contraction in a row, this time of -0.1%.
After a lot of hot air about the 0.7% expansion in Q1 being the best of the G7 nations, it seems this was somewhat of a false dawn. Export figures were up massively in Q1, with manufacturers front-loading orders to beat the looming US tariffs, combined with the UK housing market rushing to beat tax changes. Q2 is barely forecast to be above zero, even with a serious amount of BBQ food being purchased in recent weeks!
An August rate cut from the Bank of England is looking more and more likely, when the Monetary Policy Committee meet next in just over three weeks. The June inflation figures, which are released this Wednesday, will be another key piece of information towards that decision.
Another is the employment market, which was covered in a Times interview by the Bank Governor, Andrew Bailey. In this, he noted that the committee are prepared to make bigger interest rate cuts if the UK jobs figures begin to slow. This particular area is of concern at present, post the Government tax changes introduced in April, which are looking detrimental to jobs overall.
Bailey also reaffirmed the fact that interest rates are on a “gradual downward path” ongoing, with the “gradual and careful” approach used of late, still pertinent. All of this has led to even more likelihood of an interest rate cut in August, which accordingly has weakened the Pound down to the lowest level we have seen versus the Euro in three months.
On the subject of the Euro, the single currency was fairly quiet last week with little by the way of major releases. German ECB member Joachim Nagel spoke at a conference, still believing that the ECB are on the right track in terms of meeting the bloc’s inflationary goals. He noted that the committee were neither planning nor ruling out future cuts, simply monitoring on a data-dependent basis.
Currently the next ECB meeting (24th July) sees markets pricing in almost no chance of a rate cut. The following meeting on 11th September meanwhile is almost 50:50 for a reduction.
Meanwhile, the EU was on the receiving end of more threatened Trump tariff percentages again last week. The latest proposal from the President was a 30% levy to kick in on imports from 1st August. Negotiations continue between the pair, but the threats didn’t seem to harm the Euro itself last week. The single currency is up over 12% versus the US Dollar since Trump returned to power in January.
Other data releases were relatively minor. Retail Sales in the bloc though took a dive in May, falling month on month by -0.7%. This marked the biggest monthly drop since December 2023’s figures.
The Euro gained roughly 0.5% versus GBP last week, mainly off the back of the weak UK economic data. Movements on the pair can be seen in the chart below:
The week ahead:
Monday – FRA Bank Holiday, Eurogroup Meetings
Tuesday – GER ZEW Economic Sentiment (10:00), US CPI inflation (13:30), BoE Bailey speech (21:00)
Wednesday – UK CPI inflation (07:00), US PPI inflation (13:30), Fed Beige Book (19:00),
Thursday – UK Unemployment & Average Earnings (07:00), EU CPI inflation (10:00), US Retail Sales (13:30), Fed Waller speech (23:30), G20 Meetings
Friday – ECB Nagel speech (09:15), University of Michigan Consumer Sentiment (15:00), G20 Meetings
After some recent Dollar recovery, inflation news returns to the fold this week from various corners of the globe. US CPI inflation kicks things off on Tuesday, expected to show a slight rise up to 2.6% from the 2.4% in May. However, markets have continued to overestimate the impact that tariffs are having on the US economy. Figures have come in under forecast for the last four months in a row.
Regardless of the outcome of that data, the question will still be what impact it will have on the Federal Reserve’s rate decision in a couple of weeks. They will also be fed the latest US economic data in the form of the Beige Book publication, arriving on Wednesday evening.
A Truth Social post from Trump to cut interest rates off the back of either the CPI data, or the Beige Book release, feels almost inevitable.
Later in the week we also have US Retail Sales data, which in other countries lately has slipped due to nervousness about the global economy. That and US Consumer Confidence data on Friday afternoon are both significant.
In the UK, inflation also pops up too, with the UK’s June release on Wednesday morning. This is expected to remain stable at 3.4%, but we still expect a Bank of England rate cut in early August, barring a major uptick.
Bank Governor Andrew Bailey himself speaks at the annual Mansion House event on Tuesday evening. Given his comments on the UK jobs market, the UK unemployment and wage growth data of Thursday morning, will be of added importance.
The EU side also sees inflation as the focal point, this time coming on Thursday morning. Aside from this, Eurogroup meetings take place early in the week, followed by a gathering of the G20 nations in South Africa.
As always, we have plenty of movement, especially for anyone involved in buying or selling USD. To protect your budgeting, make sure to reach out to the Aston team for more information.
Have a great week.
