ACM Update 18-08-25
Despite the Bank of England’s interest rate cut of ten days ago, the pound continued a slight recovery last week, nudging to a six-week high versus the Euro. GDP data was the most significant UK release, coming in slightly above forecast.
US news was centred around inflation, where CPI remained constant, whilst producer prices increased by their most in three years. Will American companies now be forced to pass tariff costs on to consumers, adding to inflation?
This week features the latest inflation data from the UK and Eurozone, whilst the minutes of July’s Federal Reserve meeting are also published. The central bankers of the world meanwhile meet in the Wyoming wilderness, for the annual Jackson Hole Symposium.
Starting off in the UK this week, where economic growth cooled in the second quarter. Given the front-loading of orders to get ahead of US tariffs earlier in the year, Q2 was always likely to slow somewhat. The month of June, however, came in slightly ahead of forecasts, delivering 0.4% growth and thus 0.3% for the quarter as a whole.
Chancellor Rachel Reeves was more than happy to see growth “beat expectations” of 0.1% expansion in Q2 but admitted there was still more work to be done to continue growing the economy. Many analysts were quick to point out that the Q2 growth figure was still short of the 0.5% growth seen in the same quarter last year.
The outperformance of this data offered some support to the pound, on the basis that a more resilient economy is less likely to lead the Bank of England to cut interest rates as rapidly. UK weather in June certainly helped, but it may not be quite as sunny if we see tax hikes from Reeves in the autumn budget.
The slight concern in the UK though was from the latest jobs data. The number of vacancies fell by almost 6% between May & July, whilst the overall unemployment rate for June remained stable at 4.7%. Evidence suggests that companies are slowing down on recruiting, nor replacing staff members who have left.
Wage growth is also showing signs of cooling. The Average Earnings Index that measures this, hit 4.6% in June, down from 5.0% the previous month. This marked the lowest reading in nine months. The closer wage growth gets to headline inflation (currently 3.6%), the more chance we will see of interest rate cuts from the Bank of England.
Overall, though, sterling moved up during the week versus the Euro and Dollar. Despite concerns surrounding the jobs sector, the better-than-expected economic growth figures helped GBP. Movements on Sterling-Dollar can be seen in the chart below.
There were two pieces of US inflation-related data last week, which combined to produce a confusing economic picture. Tuesday’s CPI inflation release, despite recent tariff changes, remained constant in July at 2.7%, below estimates of 2.8%. Price rises in food items such as tomatoes and coffee were offset by lower energy costs.
Stabilising inflation would ordinarily pave the way for US interest rate cuts to come from the Federal Reserve. But on the other side of the coin, Core Inflation, which removes food and energy, saw its fastest rise in six months.
Tariff concerns are starting to kick in via PPI figures though, as wholesale prices showed a sharp monthly rise of 0.9%, their largest increase in three years. These are usually a leading indicator of headline inflation, which suggests a pickup in CPI is imminent also. To quote an economist’s report I read over the weekend “This is a kick in the teeth for anyone who thought that tariffs would not impact domestic prices in the US economy”.
The data also suggests that the Federal Reserve are now likely to continue in their wait and see approach to monetary policy. Fears that inflation is about to pick back up again should see the September meeting result in a hold in rates, despite the split in votes last time out in July. The minutes of that meeting are released this week.
The next US inflation data will be released in the days leading up to the next Fed meeting, which takes place on 17th September. Any form of rise in inflation from the August figures should concrete rates to be kept on hold, despite ongoing calls for a cut from Trump.
US retail sales showed a rush in spending during July, as consumers looked to get ahead of incoming tariff hikes. The figures rose monthly by 0.5%, however a softening jobs market points towards a reduction in consumer spending ahead.
Another Dollar-weakener last week was the ever-increasing US debt mountain. The Federal Budget deficit rose a staggering 19.4% year on year in July, hitting $291 billion. This was versus a forecast of circa $206 billion. Tariff revenue was up by 273% compared to July 2024, bringing in $28.4 billion.
Consumer Sentiment figures meanwhile showed a drop back to their lowest since April, as everyday Americans begin to show nervousness.
Naturally, the Trump-Putin summit in Alaska was a major news talking point last week. Despite being significant politically, there was little currency-related movement off the back of it.
On the continent, as expected the summer lull continues. Eurozone economic growth was up by 0.1% in Q2, as the continent continues to struggle for expansion. On a positive front, this marks the sixth quarter in a row of growth, albeit all under 0.5% worth. Also in the release of figures from Eurostat was the employment data for the bloc. This too showed a 0.1% growth in overall employment in Q2.
However, the latest consumer sentiment data seems to be less cheerful. Figures hit their lowest reading for the bloc since April, amidst fears that the US-EU trade deal will likely be bad for European business, rather than positive.
A quiet week in Europe was capped off with Eurogroup meetings to close out the week, followed by a bank holiday in many countries on Friday.
Sterling moved favourably against the Euro during the week, hitting a six-week high on Thursday morning after the UK GDP data was released. Movements on the pair can be seen in the chart below:
The week ahead:
Monday – Eurozone Trade Balance (10:00)
Tuesday – Canada CPI (13:30), Fed Bowman speech (19:10)
Wednesday – Reserve Bank of New Zealand rate announcement (03:00), UK CPI inflation (07:00), EU Final CPI inflation (10:00), Fed Waller speech (16:00), Federal Reserve meeting minutes (19:00)
Thursday – Public Sector Net Borrowing (07:00), EU/UK/US Manufacturing & Services PMIs (08:15-14:45), EU Consumer Confidence (15:00), Jackson Hole Symposium – Day 1
Friday – UK Retail Sales (07:00), Fed Powell speech (15:00), Jackson Hole Symposium – Day 2
Saturday – ECB Lagarde & BoE Bailey speeches (17:25), Jackson Hole Symposium – Day 3
*A brief note that Monday 25th August is a UK bank holiday, so the Aston offices will be closed for the day. The Aston Origin platform will also be unavailable for FX transactions/payments.
Despite the quieter August trading conditions, there are a number of major events in the economic calendar this week. The first two days are relatively light, but then on Wednesday we have inflation releases from both the UK and Europe.
British inflation is forecast to have nudged up to 3.7% in July (from 3.6% in June). If correct, this is likely to move the Bank of England even more confidently towards a hold of interest rates in September.
In Europe, inflation has been back on track in recent months and is expected to have held the 2.0% target again in July. This would be another positive for the bloc if correct, as other G7 nations continue to battle a recent rise in inflation again. Intertwined with this, the latest EU Consumer Confidence figures are released later in the week.
The minutes of the latest Federal Reserve meeting are published on Wednesday evening. These should contain more information on the thoughts of the two policymakers who called for a cut in the late July meeting. Those two were both Trump-appointed as previously mentioned, as well as one of them looking to be a candidate for the Fed Chair role next year (or sooner…..).
Other important UK data releases are the latest retail sales data and Government borrowing figures. The latter will display just how close Rachel Reeves is to her self-imposed budget figures, potentially adding more fuel to the fire of tax rises to come in the autumn.
The back part of the week though sees the major central bankers and economists of the world head west, for the Jackson Hole Symposium in Wyoming, USA. The annual gathering will see plenty of fire-side chats from the likes of Powell, Bailey & Lagarde, giving thoughts on global markets and monetary policy.
This is definitely something to be aware of from a volatility perspective later in the week, the event always leads to some interesting commentary and narrative.
For any looming FX conversions, get in touch with the Aston team to discuss in more detail. Despite the summer lull, we have significant market events taking place this week which are likely to cause movement.
Have a great week and enjoy the bank holiday next weekend, for those clients in the UK
