Written by the Market Insights Team<\/p>\n
BoE to cut today<\/p>\n
George Vessey \u2013 Lead FX & Macro Strategist<\/p>\n
The Bank of England (BoE) is expected to cut rates by 25bps to 4.00% today. However, given the mixed signals from recent economic data, we anticipate a three-way vote split, with two members favouring no change and two advocating for a more aggressive 50bps cut. There has not been a single unanimous vote in this cycle and this divergence reflects the tension between persistent inflation concerns and signs of economic slack. Sterling\u2019s reaction may be muted, but we think the balance of risk is tilted to the downside.<\/p>\n
With the cut largely priced in, attention shifts to the committee\u2019s forward guidance specifically, whether it will reaffirm its pattern of quarterly reductions or hint at a change in pace. The key uncertainty hanging over this meeting is the risk of a deeper deterioration in the labour market. So far, the evidence points to a gradual weakening rather than a sudden downturn. At the same time, inflation remains persistently high, especially in the services sector, adding another layer of complexity to the policy outlook.<\/p>\n
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Overall, we expect the August forecasts to closely mirror May\u2019s Monetary Policy Report, with only modest adjustments: inflation steady, GDP slightly higher on reduced tariff drag, and softer labour market projections. The BoE is also expected to address the impact of quantitative tightening (QT) on bond yields. If QT is exerting more upward pressure than anticipated, it could prompt the Bank to consider slowing the pace of active gilt sales.<\/p>\n
It\u2019s hard to draw a clear conclusion on whether the BoE will lean dovish or hawkish. What\u2019s more evident is the asymmetry in sterling rate pricing. If the Bank sticks to quarterly 25bp cuts, current market expectations \u2013 just 60bp of easing by February \u2013 look too shallow. That leaves room for more cuts to be priced in, weighing on the pound via the yield channel. Conversely, if the BoE turns hawkish in response to sticky inflation within a stagflationary backdrop, sterling could still come under pressure. Higher nominal rates may not lift real yields if inflation expectations stay elevated and growth weakens, reducing the appeal of UK assets.<\/p>\n
The bottom line is, the pound may be looking at a lose-lose situation here, especially against the euro. Seasonally, we\u2019re also wary that GBP\/USD usually falls in the month of August. The pair\u2019s failure to close above the 100-day moving average resistance may be a warning sign.<\/p>\n
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Two Kevins<\/p>\n
Kevin Ford \u2013 FX & Macro Strategist<\/p>\n
While the full extent of the economic damage from the new tariff regime is yet to be seen, the pressure on the Fed to adopt a more dovish stance is unlikely to disappear. This pressure could intensify as President Trump has announced a decision on a new Fed governor will be made \u201cbefore the end of the week.\u201d He also stated that four people are being considered for the position of Fed chair, including \u201ctwo Kevins and two other people.\u201d Currently, Kevin Warsh, former FOMC governor from 2006 to 2011, appears to be the front-runner to replace Powell. The prospect of Powell\u2019s successor being known in advance, effectively creating a \u201cshadow Fed,\u201d will likely weigh on market sentiment and the dollar.<\/p>\n
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Adding to the chorus of concern is Minneapolis Fed President Neel Kashkari, who stated in a CNBC interview that \u201cthe economy is slowing.\u201d He suggested it may \u201cbecome appropriate to start adjusting the federal funds rate,\u201d referring to the central bank\u2019s benchmark rate. Kashkari also highlighted the significant uncertainty surrounding tariffs and their impact on inflation, questioning, \u201cHow long can we wait until the tariff effects become clear? That\u2019s just weighing on me right now.\u201d He suggested that making \u201csome adjustments and then we have to pause, or even then we have to reverse course, might be better than just sitting here on hold until we get clarity on tariffs.\u201d<\/p>\n
Meanwhile, the 10-year breakeven rate, a key measure of long-term inflation expectations for the Fed, has been steadily climbing since mid-April.<\/p>\n
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As real yields drop and the yield curve steepens, the dollar is feeling the weight of economic slowdown worries. As the market\u2019s focus shifts from broad macro shocks to specific bilateral agreements, investor attention is increasingly turning toward macro indicators like inflation and growth. Emerging markets, led by China, could provide some of the earliest clues. The recent rally in U.S. assets alongside softening commodity prices underscores rising skepticism about global growth outside the U.S. The soft-landing narrative for the U.S. economy, however, remains a key anchor. If this narrative were to be shaken, it could trigger a rapid shift in market positioning. For now, it remains the primary source of the dollar\u2019s vulnerability, and the market will likely remain cautious before allowing for renewed dollar strength.<\/p>\n
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Euro\u2019s swift comeback<\/p>\n
George Vessey \u2013 Lead FX & Macro Strategist<\/p>\n
Last week\u2019s warning that the euro\u2019s slide against the dollar might be short-lived has already played out faster than we expected. EUR\/USD posted its strongest daily gain since April following Friday\u2019s soft US jobs report and has climbed another 0.7% this week, reclaiming ground above its 21-day moving average.<\/p>\n
The correlation between EUR\/USD and short-term yield spreads has surged back to 2025 highs, after fading earlier this year when the euro briefly acted as a haven amid US recession fears. With rate differentials once again steering the narrative, the pair looks poised to catch up, especially if the Fed leans as dovish as markets now anticipate.<\/p>\n
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Traders are pricing in up to 75bps of Fed cuts by year-end, spurred by weak US employment and services data. Treasury buying and rate-cut hedging have intensified. In contrast, the ECB remains cautious, with swaps showing less than a 50% chance of further easing. Some Governing Council members, including outgoing hawk Holzmann, are pushing back against additional cuts, citing inflation near target and reduced external risks following a new trade deal with the US.<\/p>\n
Meanwhile, President Trump\u2019s latest tariff threats have revived policy uncertainty and volatility, raising fears that US growth could take a bigger hit than elsewhere. That\u2019s helping reinforce the view that the euro may offer a more stable alternative to the dollar \u2013 a theme gaining traction as rate dynamics shift in the euro\u2019s favour.<\/p>\n
Swiss franc under pressure<\/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