By Paul Newfield
The pound has dropped over a half a cent against the euro since the highs of early last week – the instalment of yet another unelected PM did not give the pound the added strength that was perhaps anticipated. The euro itself climbed back above $1.14, rebounding from near one-year lows reached last week against the Dollar, as easing tensions between the US and Iran and a sharp decline in oil prices improved risk sentiment. Brent crude retreated from two-month highs, helping ease inflation concerns and prompting money markets to slightly scale back expectations for further European Central Bank tightening, though they still price in nearly two 25-basis-point rate hikes by February 2027. ECB Chief Economist Philip Lane said the current inflation shock remains moderate, warranting some additional policy tightening but not an aggressive response. He also reiterated that inflation is expected to return to the ECB’s 2% target over the coming year. Last week, the ECB left interest rates unchanged, as expected, while signalling that another rate hike in September remains possible. Investors now await fresh inflation data later this week for further clues on the policy outlook.
The dollar index slipped to around 101.2 on Monday, giving back some of last week’s gains as oil prices retreated following a pause in hostilities between the US and Iran over the weekend, easing concerns over supply disruptions and inflation. The US suspended its nearly two-week campaign of strikes against Iran beginning late on Friday without an official announcement, while Tehran said it had ended its retaliatory military operations and held discussions with Oman over the Strait of Hormuz. Meanwhile, investors are preparing for the Federal Reserve’s policy meeting this week, where officials are widely expected to leave interest rates unchanged. However, some market participants believe the central bank could act as early as this week’s meeting in response to renewed inflationary pressures. Investors are also awaiting advance Q2 GDP figures and PCE inflation data, as well as earnings from major US companies for fresh insights into the strength of the economy.
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