ACM Update 28-07-25
Sterling-Euro dropped to a 20-month low on Friday, as the pound remained on the back foot. Government borrowing in the UK rose by more than expected, whilst the Euro took a boost from a hold in interest rates and a more upbeat outlook from the ECB. The long-awaited EU-US trade deal was also reached over the weekend.
This week brings the latest Trump deadline, but will it be tariff or TACO, this time around? In a big few days for US data, we also have the latest Federal Reserve meeting, Core PCE inflation, then Non-Farm Payrolls on Friday to close out the week.
The first of the big three to hold their latest interest rate meeting, the ECB held interest rates steady for the first time in just over a year. In that period, interest rates had gone from 4% to 2% as inflation concerns began to subside, and the committee have moved their focus to boosting growth. More recently, trade concerns as a result of tariffs have seen them move to pause in this latest meeting.
Overall, the picture from the ECB was one of optimism, which aided the fortunes of the Euro against other majors throughout Thursday. The decision to hold rates in this meeting, was also declared as unanimous by Christine Lagarde in her press conference. Markets moved to trim their expectations of a September rate cut accordingly, now seeing roughly a 20% chance of that happening.
The outlook for inflation being uncertain as a result of tariffs, was a considerable factor in the lack of change from Frankfurt. The EU spent last week edging towards a 15% tariff deal with the US, which was finally completed over the weekend.
The deal was viewed as somewhat of a victory for both sides. Last year, the EU and US exchanged $975 billion worth of goods, according to figures from the US Commerce Department. Trump portrayed the agreement as “the biggest deal ever made” which perhaps on those figures isn’t unrealistic.
In other data releases, EU Consumer Confidence figures remain fragile, whilst June’s Manufacturing & Services PMI figures both came in slightly better than expected.
Overall, a very good week for the Euro, especially versus GBP where it moved to the best since November 2023, late on Friday. Movements on GBP-EUR last week can be seen in the chart below:
On the UK side of things, the pound continues to suffer from the weak run of data seen of late. Once again, the British currency lost value against both the Euro and Dollar last week. One of the latest pieces of bad news was Government borrowing in the UK, which rose by more than expected in June. The figure borrowed was £20.7bn for the month, up £6.6bn on the equivalent period last year.
The recent reversals on benefit cuts are likely to lead to Chancellor Reeves raising taxes in her autumnal budget. These rollbacks, a debt mountain and a shrinking economy, have wiped out any budget headroom she may have had. Looming tax rises will be more bad news for the UK economy and many economists expect the budget deficit to get worse as we go through the year.
Reeves has also recently been calling for a reduction in regulation in the financial services sector. She referred to banking measures as a “boot on the neck of UK businesses” and has urged the Bank of England, who oversee the rules, to relax them. In a speech last week, Bank Governor Andrew Bailey said he is open to making changes to these rules that were implemented post the financial crisis. However, he does not see them as holding back the economy. This is the latest run-in between Bailey and Reeves.
A minor positive for Reeves was the uptick in June’s retail sales numbers. Beverages in supermarkets, summer clothes and fuel sales all rose, as the UK basked in some summer weather and BBQ spending. The rise of 0.9% for June doesn’t erase the -2.8% fall in May though.
Overall, Q2 saw a rise of just 0.2% compared to Q1 for retail sales, not exactly buoyant news for the overall economy. It is expected that UK economic output will have shrunk in Q2, painting an even gloomier picture. The stronger Q1 after tariffs pushing more trade earlier in the year, is seemingly short-lived.
Over in the US, the Trump-Powell head-to-head continued, just this time it was in a live news bulletin from the infamous building work taking place at the Federal Reserve. Trump decided to declare on live TV that the fed extension had gone 20% over budget, whilst the Fed Chair read the small print of the President’s note, which include a building finished 5 years ago. Cringeworthy comedy.
Data releases continue to present a vulnerable picture of the US as tariffs begin to bite. Figures for shipping containers carrying US imports showed a second monthly fall, this time by 7.9% for June (year on year) after 6.6% for May. Last week also saw the Congressional Budget Office declaring the recently signed tax bill will add $3.4 trillion to US debt over the next ten years.
Durable Goods orders also fell by their most in five years in June, mainly due to a drop in Boeing aircraft orders. The big drop wasn’t as bad as markets had feared though, giving an idea of the shocks expected. In the automotive sector, Stellantis last week declared a loss for H1 of the year, whilst General Motors declared that tariffs are raising costs and denting profits.
The Dollar did enjoy somewhat of a recovery later in the week though. The fact that Powell wasn’t giving his marching orders by Trump gave a fraction of stability to the currency. Again, markets are braced for the worst here, and a Powell sacking would really damage the ongoing prospects of the Dollar.
GBP-USD movements last week can be seen in the chart below:
The week ahead:
Monday – CBI Realised Sales (11:00 UK time)
Tuesday – UK Mortgage Approvals (09:30), JOLTS Job Openings & Consumer Confidence (15:00)
Wednesday – ADP Non-Farm (13:15), US Advance GDP (13:30), Bank of Canada rate announcement (14:45), Federal Reserve rate announcement (19:00) & Press Conference (19:30)
Thursday – Bank of Japan rate announcement (03:00), US Core PCE Price Index (13:30)
Friday – EU CPI Inflation Flash Estimate (10:00), US Non-Farm Payrolls (13:30)
A busy week ahead for the US then, with 1st August rapidly approaching for nations to agree trade deals with Trump. The EU deal being agreed over the weekend was the big one, but hasn’t benefitted the Euro thus far. The main beneficiary in Monday trading has been the Dollar itself, and as always, what is good news for the Dollar is often bad news for the Euro. The Euro has weakened off, back from the lows seen on Friday.
Beyond the Trump-Powell spat of last week, this Wednesday evening’s Federal Reserve meeting is the next key point. Wednesday evening’s meeting is expected to produce a hold in interest rates, as inflation nudges up and tariff uncertainty remains high. If things cool between now and the next meeting, then there may be more room for the Fed to cut.
Then the remainder of the week also features the July Non-Farm Payrolls data, alongside other jobs-related figures. These will give a key snapshot of the jobs market, which remains buoyant despite the recent uncertainty.
UK and EU data remains reasonably quiet, with just EU inflation on Friday as the standout. This is forecast to remain on or very close to the 2% target.
With all eyes on the US this week, clients with Dollar-related conversions should make sure to get in touch with the Aston team. A volatile week ahead as always.
Have a great week.
