By Kian Songra
Pound under pressure against the Euro
Recently we have seen a flurry of down beat data for the UK, such as increasing unemployment and negative growth. A slowing UK economy points to another interest rate cut from the Bank of England next month, with policymakers likely to signal an additional cut before the end of the year as they maintain a quarterly pace of easing.
The Pound has been under pressure in recent weeks due to growing market bets on an August rate cut and the possibility of a third reduction later this year. However, those expectations were significantly tempered by last week’s stronger-than-expected inflation and wage data. These figures serve as a reminder to the Bank that moving too quickly on rate cuts risks reigniting inflationary pressures.
If interest rate expectations can stabilise, the Pound may find firmer support. Adding to this support is a broadly positive global equity market environment, with investor sentiment buoyed by optimism around further gains in indices such as the S&P 500 and FTSE 100. Therefore, those looking to sell Euro may want to look at capitalising on this potential opportunity before the Pound shows signs of strengthening. Likewise, those looking to buy Euros may want to ensure their property costs do not increase by the risk of the Pound continuing to make any ground on the Euro.
With the UK’s deficit now at 5.7 % of GDP, the third highest among 28 advanced European economies. Public debt is also at 94 % of GDP, with Sterling’s health under growing scrutiny. The 10‑year gilt yield recently climbed to around 4.7 %, the third highest across advanced economies before easing slightly to 4.60 %. This yield acts as a crucial gauge of investor confidence: the higher it rises; the more compensation markets demand for inflation risk and concerns over the government’s repayment capacity. While elevated yields can sometimes attract foreign capital and support GBP through yield carry, in the UK’s case they often reflect fiscal stress, which tends to weigh on the Pound. In essence, as gilt yields rise due to deficit worries, GBP generally weakens, signalling investor unease about the UK’s economic and fiscal outlook.
Across the Pond
The US Dollar started the week under pressure, weakening against major currencies in Monday’s trading. Investors remain cautious amid renewed trade tensions ahead of the August 1 tariff deadline, contributing to a more risk-averse mood. While recent US economic data has been mostly solid, the Dollar is facing headwinds from ongoing uncertainty tied to the Trump administration’s renewed tariff threats and growing political pressure on the Federal Reserve to lower interest rates.
Remaining data this week
The focal point this week is the European Central Bank (ECB) meeting, where rates are expected to remain unchanged as it concludes its easing cycle. In June, President Lagarde emphasised that the ECB is well-positioned to manage current uncertainties, but she stopped short of promising further cuts. The deposit rate is widely expected to stay at 2.00%, with policymakers indicating no additional reductions are planned. However, lingering risks, particularly over a possible intensification of US/EU trade tensions and a further Euro appreciation, could alter this outlook. If the ECB truly has concluded its rate-cutting campaign, this should bolster the euro by widening the interest rate gap with the Dollar and Pound.
The press conference 30 minutes after the release it critical as it gives investors potential insight into its outlook. Every comment will be closely scrutinised by the market participants, to try and gauge what future steps the ECB may take.
Thursday also brings a flurry of Purchasing Managers’ Index (PMI) data releases from the EU, UK and US. The PMI is a monthly survey of purchasing managers across the manufacturing and services sectors. A PMI above 50, signals expansion, while below 50 indicates contraction. This release makes it a key early-warning gauge ahead of GDP and shows an indication into the economic health.
On Friday, the UK releases its Retail Sales reading. The early predictions show that the retail sales figure will come out at 1.5%. This is in contrast to last month’s reading of -2.7%, which was a shock reading, coming out a lot worse than expected. As history shows, this figure is hard to determine and if it comes out of line with the expectations, expect market volatility.
Timing your currency purchase is critical as it affects your initial investment and then can impact your profitability when selling. It is vital to stay in close communication with your account manager during this period of heightened market volatility, to ensure you’re fully informed of developments and the strategies available to mitigate the risk of adverse currency movements.