Written by the Market Insights Team<\/p>\n
Dovish Fed bets mount after soft data patch<\/p>\n
George Vessey \u2013 Lead FX & Macro Strategist<\/p>\n
Traders are ramping up bets on Fed rate cuts following Friday\u2019s disappointing jobs report, which weighed on equities and the US dollar and sent bond prices sharply higher. Despite the setback, stocks have consolidated, buoyed by confidence that corporate America might be able to weather tariff headwinds but mainly on hopes the Fed will act to prevent a recession.<\/p>\n
San Francisco Fed President Mary Daly added fuel to the dovish narrative, noting that the time for rate cuts is approaching as labour market softness becomes more evident and inflation remains contained despite tariff pressures. Money markets now assign over an 80% probability to a 25bp rate cut next month, with a one-in-three chance of another by year-end.<\/p>\n
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The broader question for risk assets is whether weak data is seen as bad news (signalling deeper economic trouble) or good news (prompting Fed easing). A mild slowdown could support risk appetite if it leads to more accommodative policy. But a sharp and sustained rise in unemployment would likely sour sentiment, raising concerns over growth and corporate earnings.<\/p>\n
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The latest ISM services report captures the Fed\u2019s dilemma: headline activity missed expectations, employment fell to its lowest since March, yet prices paid surged to the highest since October 2022. This stagflationary mix \u2013 slowing growth with sticky inflation \u2013 is precisely what many economists warned could result from tariff policy. That these dynamics are emerging in the services sector, which is typically less exposed to trade frictions, is particularly notable \u2013 and not especially reassuring.<\/p>\n
US stocks, yields and the dollar came under selling pressure following this data. In our view, the balance of risks, now, once again points to the downside for the dollar due to Fed easing policy later down the line, the likely negative impact of tariffs on the US economy, and Trump\u2019s continued \u2018unorthodox\u2019 policy approach.<\/p>\n
UK macro headwinds put sterling under strain<\/p>\n
George Vessey \u2013 Lead FX & Macro Strategist<\/p>\n
The pound has been trading in a narrow range versus the US dollar this week, unable to convincingly break above or below $1.33. GBP\/EUR has also be trading sideways with \u20ac1.15 acting as an anchor. The Bank of England\u2019s (BoE) meeting tomorrow could inject some life into sterling, but the domestic backdrop begs the question \u2013 will this be a lose-lose situation for GBP?<\/p>\n
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A 25-basis point cut is almost fully priced in by markets, so attention will be on the vote split, economic projections and forward guidance. If the BoE adopts a more hawkish stance in response to sticky inflation within a stagflationary environment \u2013 it could put additional pressure on sterling. Conversely, a shift toward lower interest rates would likely weigh on the pound through the yield channel, as reduced returns make UK assets less attractive to global investors.<\/p>\n
Despite the UK composite PMI for July being revised higher yesterday from 51 to 51.2, thanks to a positive revision in the services PMI, the UK economy is facing mounting pressure, with short-term fluctuations and deeper structural issues both contributing to a worsening outlook. The slowdown in UK economic momentum is becoming increasingly evident amid the Citi Economic Surprise Index turning decisively negative, reflecting a string of disappointing data releases.<\/p>\n
Any meaningful improvement is unlikely before the autumn Budget, which puts our optimistic projection for sterling \u2013 targeting $1.35 to $1.40 later this year \u2013 at risk unless the dollar weakens further. That said, we still anticipate a broader decline in the dollar once summer passes, which should give sterling room to recover and move back toward our expected range.<\/p>\n
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Euro in consolidation mode<\/p>\n
George Vessey \u2013 Lead FX & Macro Strategist<\/p>\n
It\u2019s been a quiet start to the week in FX, with euro in consolidation mode in the higher realms of $1.15 versus the US dollar. EUR\/USD continues to bump into resistance near its 50-day moving average within a whisker of $1.16, whilst the 100-day moving average down at $1.1384 offered decent support last week.<\/p>\n
On the data front, June saw euro area industrial producer prices rise by 0.8% month-on-month, marking a reversal after three straight months of declines and aligning with market expectations. The rebound was largely driven by energy costs, which surged 3.2% following a 2.2% drop in May, highlighting the volatility in input prices.<\/p>\n
Meanwhile, geopolitical trade tensions are resurfacing. President Trump has proposed aggressive tariffs on pharmaceutical imports, with rates potentially reaching 250% over the next 18 months. This is particularly significant for Europe, as medical and pharmaceutical goods represent its largest export category to the US\u2014accounting for roughly 20% of total exports in 20242. Despite the scale of the threat, markets showed little immediate reaction, likely due to the EU\u2019s recent decision to suspend retaliatory measures.<\/p>\n
However, the broader macro implications are more nuanced. With the EU stepping back from countermeasures and the US pressing ahead with sector-specific tariffs, the result could be a disinflationary impulse for the euro area. Reduced export demand and redirected global supply chains \u2013 especially from China \u2013 may exert downward pressure on prices, reinforcing expectations for further ECB easing.<\/p>\n
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Oil prices are under the pump<\/p>\n
Table: Currency trends, trading ranges and technical indicators<\/p>\n
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Key global risk events<\/p>\n
Calendar: August 4-8<\/p>\n
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All times are in BST<\/p>\n