ACM Update 26-08-25
UK inflation rose by more than expected in July. The reading may have been above market estimates but falls in line with recent forecasts from the Bank of England. In the US, the Federal Reserve meeting minutes displayed inflation concerns outweighing the recent jobs market slowdown. Jerome Powell’s Jackson Hole speech however saw the Fed opening the door for rate cuts to come.
In a quieter four-day week to end August after Monday’s UK bank holiday, data releases are somewhat quieter. Thursday’s release of the minutes from the most recent ECB meeting is arguably the only standout. US focus will be on further Trump meddling in the running of the Federal Reserve.
The central bankers of the world all gathered in the US wilderness last week, for the annual Jackson Hole Symposium in Wyoming. This saw speeches from all the big names, however the Jerome Powell speech was the most notable. Having faced considerable pressure from the White House in recent months to cut rates, it seems the Fed may be at that stage now.
First though, we should briefly cover the other major US data event last week, the release of the Federal Reserve meeting minutes. This saw the discussions from the late July meeting published, which saw rate-setters hold firm overall, with two dissenters for the first time this century. The general consensus from this was that (at the time) inflation was a bigger concern than a slowing jobs market.
However, it was Powell’s Friday speech which stole the limelight, with a much more current view of events from the Fed Chair. With no rate cuts since Trump 2.0 began, the committee are now seemingly moving towards another cut soon. At least, that was the wording from Jerome Powell.
His speech acknowledged the downside risks to the employment market, as well as upside risks to inflation, in line with the Fed minutes. However, he commented that the assumption of Trump’s tariffs having only a short-lived impact on inflation, was “reasonable”. A suggestion that rates are ready to come down accordingly, perhaps?
But the phrase that moved the US Dollar and stock markets was the following: “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
This essentially threw the door wide open for imminent rate cuts, as early as the next policy meeting. For that meeting (17th Sept), markets are now pricing in an 80% chance of a rate cut to come. The US Dollar reacted accordingly late on Friday, losing 1% against both the Euro and GBP, eradicating all gains made during the week.
This will be music to the ears of Donald Trump, who has long been pushing the case for lower US interest rates. The President was also meddling in Fed business elsewhere last week, calling for Governor Lisa Cook to resign or be fired, amidst accusations of mortgage fraud. This would further strengthen his control over monetary policy, by adding another voter of his choice to the panel.
Cook meanwhile stated she has no intention of “being bullied to step down”. Matters escalated further last night when Trump ordered the removal of Cook from her post. Once again though, does he have that authority?
Overall, nerves remain amongst Americans about the state of the US economy, with home-purchase contracts being canceled at a record rate in July. High mortgage rates, expensive property prices, rising inflation and nerves about the economy were behind this.
As per the chart below, GBP-USD spent the week heading south before the Powell speech on Friday afternoon:
Bank of England Governor Andrew Bailey also took the trip west for the Jackson Hole event. He described Britain as facing an “acute challenge” of slow economic growth, a reduced workforce and stubborn inflation. With the UK facing the highest inflation rate of the G7 nations in July, there are still added fears from his corner that it will take time to get back to the 2% target.
Indeed, the July inflation figure was released last week, seeing UK inflation tick up to 3.8% for the month. Much of this was attributed to the higher air fare prices the month brings, which increased the most between June & July (30.2%), since records began in 2001. Worryingly there was a further increase in food prices, now up by 4.9% in the year to July.
The rise though does fall in line with expectations mentioned by the Bank of England earlier this month, when they cut their headline interest rate to 4%. The peak in inflation they expect to happen in September, with figures of approximately 4%. Worryingly for the Government, September’s data is the month used to confirm the triple lock figures, for how much pensions will increase by next year. Not good news for Rachel Reeves’ ever-increasing financial black hole.
This brings us nicely on to Government borrowing, which was in fact lower than expected in July, thanks to increases from tax hikes and National Insurance receipts. The shortfall was “only” £1.1bn and £2.3bn less than July 2024 but borrowing over the first four months of the financial year is now £60bn, up £6.7bn on the same period last year. As a result, further tax hikes are widely expected in the autumn budget.
ECB president Christine Lagarde was also in Wyoming for the Symposium. She used her Saturday speech to discuss how the Euro zone has benefitted from an influx of foreign workers in recent years, boosting the economy. This pushed the EU population (450.4 million) to a record high last year, despite declining birth rates.
Inflation in the bloc remains on track with the July figure being confirmed as 2.0%, now the second month in a row on target. Of the major nations, France remained at 0.9%, Italy was down at 1.7%, Germany slowed to 1.8% and Spain sped up to 2.7%.
Overall, PMI data for the bloc shows reason for encouragement. This grew slightly in August, helped considerably by manufacturing which expanded for the first time since June 2022. The data suggests a 0.2% quarterly growth rate, in line with ECB expectations but still sluggish, as with the UK.
Sterling-Euro was largely driven by the UK inflation data on Wednesday, as illustrated in the chart below:
The week ahead:
Monday – UK BANK HOLIDAY
Tuesday – US Durable Goods Orders (13:30), Conference Board Consumer Confidence (15:00)
Wednesday – Australian CPI inflation (02:30), Fed Barkin speech (16:45)
Thursday – ECB Meeting Minutes (12:30), US Prelim GDP (13:30), Fed Waller speech (23:00)
Friday – German CPI inflation (07:00), Spanish CPI inflation (08:00), US Core PCE inflation (13:30)
As mentioned, a quieter four-day week to end the August lull, before financial markets are back into full swing as of September. For Europe, Thursday’s release of the ECB minutes will give further information on the consensus of the committee in their 24th July meeting. Arguably slightly outdated information of course, but little has changed over the quieter summer period.
Aside from that, a few US releases take place with Preliminary GDP for Q2, as well as the Fed’s favourite inflation measuring tool of Core PCE inflation. The former will display just how much impact Q2’s tariffs had on overall economic growth, thus is significant. Consumer confidence figures are also released.
Trump will likely continue to make his own waves in his ongoing battle against the Federal Reserve. Lisa Cook remains his focal point for now, as he seeks to remove a member of the committee and add someone else more in line with his own views. UK events are likely to take a back seat.
Friday afternoon was another demonstration of how quickly currency markets can move. For any upcoming FX requirements, make sure to reach out to the Aston team and we can discuss how to protect your currency exposure, in more detail.
Have a great week.
