Glimmer of risk appetite post UK-US trade deals
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Daily Currency Update
The British pound (GBP) has shown broad strength recently, appreciating against the USD, EUR, and JPY. This momentum is driven by a combination of resilient macroeconomic indicators and improved trade terms. A key development is the UK-US trade update effective today, which reduces automotive tariffs from 27.5% to a 10% quota and eliminates 10% aerospace tariffs on engines and parts, boosting UK exporters and supporting GBP.On the monetary front, the Bank of England held interest rates steady last week, but Governor Andrew Bailey signalled potential rate cuts due to a weakening job market. Markets now anticipate a cut as early as the next meeting which could put pressure on the pound in coming weeks. Economic data remains mixed with June services PMIs showing improvement, reinforcing growth prospects, while the CBI retail indicator dropped sharply, suggesting consumer fatigue. Final Q1 GDP figures confirmed solid growth, led by the services sector which shows the UK could be in a better position that anticipated.
Nevertheless, political uncertainty looms. Prime Minister Keir Starmer’s Labour government faces internal tensions over proposed welfare reforms, with over 100 MPs potentially rebelling. This could introduce instability and pressure for the pound if political risks escalate. Overall, while GBP is supported by trade and economic resilience, monetary policy shifts and political unrest pose notable risks this week and beyond.
Key Movers
The U.S. dollar remains weak despite traditionally supportive factors like geopolitical tensions and rising oil prices, which in normal circumstances provide the Greenback with a platform as a safe haven currency. A brief rally during the recent Middle East crisis faded quickly, reflecting investor concerns about the U.S. medium-term outlook coupled with the notion in some parts of the market that the US currency maybe losing some of its safe haven status. Markets expect three Fed rate cuts by the end of 2025 now, though Chair Powell emphasises strong growth, tight labour conditions, and persistent inflation, signalling caution. Diverging views within the Fed, especially from Bowman and Waller, add to uncertainty. Political risks, including Trump’s criticism of Powell and threats to Fed independence, further weigh on sentiment as we head into this week. Downward revisions to Q1 GDP and looming trade tensions also contribute to dollar downside risks which has seen the EURUSD and GBPUSD pair hit highs not seen since 2021 last week.The Euro has recently gained strength last week, supported by a relatively more hawkish European Central Bank (ECB) compared to the U.S. Federal Reserve. The narrowing rate differentials have pushed EURUSD’s fair value to around 1.145, with the current level (~1.170) only slightly overvalued. A resurgence in USD risk sentiment could drive the pair towards 1.20. However, risks are emerging. ECB Chief Economist Philip Lane acknowledged disinflation progress but maintained a dovish tone, suggesting potential rate cuts if economic weakness persists. June PMIs showed modest services growth but ongoing manufacturing contraction. Political uncertainty, including a no-confidence vote against EC President von der Leyen, could also weigh on the euro.
Expected Ranges
- GBP/USD: 1.3645 - 1.3760 ▲
- GBP/EUR: 1.1610 - 1.1690 ▼
- GBP/AUD: 2.0765 - 2.1005 ▲
- EUR/USD: 1.1620 - 1.1745 ▲