By James Caley
It’s been a lively week in the currency markets, with sterling managing to hold its ground thanks to the UK’s persistent inflation problem and cautious Bank of England committee. Wednesday’s CPI data showed inflation refusing to budge, sticking at levels that make any near-term rate cuts look unlikely. The BoE followed up on Thursday by keeping rates on hold, but the tone was anything but relaxed. With services inflation still running hot and wage growth proving stubborn, the Bank seems firmly on the side of caution. The pound responded well, strengthening against both the euro and the dollar, as traders dialled back expectations for a summer rate cut.
Against the euro, sterling found further support as eurozone data failed to impress. Confidence surveys came in soft, and while inflation is still above target, the broader economic picture remains murky. A string of ECB speeches this week did little to shake things up—dovish undertones crept in, but nothing concrete emerged. That said, there’s been growing political noise around the idea of joint eurozone borrowing, which could, if it gains traction, add a longer-term tailwind for the single currency. For now though, the pound has the upper hand.
In the US, it was all about the Fed. After Tuesday’s underwhelming retail sales and industrial production numbers, the market was braced for a cautious message—and that’s exactly what it got. The Fed left rates unchanged, as expected, but significantly scaled back its rate-cut plans for the year, now pencilling in just one. Chair Jerome Powell struck a balanced note, warning that sticky inflation—possibly amplified by ongoing tariffs—could keep policy tighter for longer. It was enough to keep the dollar on reasonably firm footing, although the lacklustre data earlier in the week capped any real enthusiasm.
Further afield, the Australian dollar drifted lower despite a steady unemployment rate, caught in the broader pullback in risk appetite. With geopolitical tensions still simmering and global growth nerves never far from the surface, the Aussie found itself out of favour.
Looking ahead, Friday’s UK retail sales figures and Germany’s producer price data will round out the week. They may not be blockbuster releases, but in a market this sensitive to every twist in the inflation story, even a small surprise could spark some end-of-week volatility.