ECB, UK Inflation and Geopolitics Take Centre Stage
Key Highlights
Sterling begins the week on firmer foundations. GBP/USD ended last week near $1.346, recording a third consecutive weekly gain, while sterling also achieved a fourth successive weekly advance against the euro. Greater clarity surrounding the UK’s political transition and expectations of a fiscally cautious government supported UK assets.
The dollar lost ground despite renewed safe-haven demand. The US Dollar Index declined approximately 0.2% over the week, as softer US inflation reduced expectations of an imminent Federal Reserve rate increase. Escalating tensions in the Middle East and rising oil prices nevertheless limited the dollar’s losses.
EUR/USD finished around $1.144, approximately 0.2% higher on the week. Attention now turns to Thursday’s European Central Bank decision, where rates are expected to remain unchanged but communication could retain a hawkish bias.
Oil remains an important FX risk. Brent crude moved back above $90 per barrel as the US–Iran conflict intensified. Further increases could revive inflation concerns, support the dollar through safe-haven flows and complicate the outlook for the ECB and Bank of England.
This week’s principal currency catalysts include UK employment and inflation figures, the ECB interest-rate announcement and flash PMI surveys from the UK, eurozone and United States.
Market Recap
The US dollar finished last week modestly weaker after June inflation slowed more sharply than markets had anticipated. Headline CPI fell 0.4% month-on-month, leaving the annual rate at 3.5%, while core inflation was unchanged on the month. The figures encouraged investors to reduce expectations of an immediate Federal Reserve rate increase. However, US retail sales subsequently rose 0.2% in June, with the core measure gaining 0.5%, indicating that household demand remains comparatively resilient.
Sterling was one of the stronger performers. GBP/USD gained approximately 0.4% over the week, supported by an orderly UK political transition and expectations that the incoming administration will maintain fiscal discipline. UK GDP also expanded 0.1% in May and 0.7% over the three months to May, although weakness in construction and industrial production highlighted an uneven recovery.
EUR/USD ended close to $1.144, with the euro benefiting from the softer dollar but remaining constrained by weak regional growth indicators and uncertainty ahead of the ECB meeting.
Our Thoughts for the Week Ahead
We expect GBP/USD to remain sensitive to domestic data and political announcements. Tuesday’s labour-market figures and Wednesday’s inflation report will help determine whether markets increase expectations of another Bank of England rate rise. A combination of firm wage growth and inflation above forecasts could support sterling; softer figures would expose the currency to profit-taking following its recent gains. The Bank of England’s next formal policy decision is not until 30 July.
For the euro, Thursday’s ECB meeting is the week’s defining event. Rates are widely expected to remain unchanged, meaning the reaction may depend more heavily on President Lagarde’s assessment of energy-driven inflation. A warning that higher oil prices could create persistent price pressures may support EUR/USD, while a cautious emphasis on slowing growth could weigh on the currency.
The US calendar is lighter ahead of the Federal Reserve meeting on 28–29 July. Consequently, the dollar may be driven primarily by global risk sentiment, oil prices and Friday’s PMI surveys. Overall, we see scope for continued volatility rather than a clear directional move, with geopolitical developments capable of overriding economic data.
Week Ahead: Key Economic Events
Monday
No major GBP, EUR or USD economic releases scheduled.
Tuesday
7:00AM UK Claimant Count Change
7:00AM UK Average Earnings Index (3m/y)
Wednesday
7:00AM UK Consumer Price Index (CPI) y/y
Thursday
1:15PM EU ECB Main Refinancing Rate
1:15PM EU ECB Monetary Policy Statement
1:30PM US Initial Jobless Claims
1:45PM EU ECB Press Conference
Friday
7:00AM UK Retail Sales m/m
8:15AM EU French Flash Manufacturing PMI
8:15AM EU French Flash Services PMI
8:30AM EU German Flash Manufacturing PMI
8:30AM EU German Flash Services PMI
9:30AM UK Flash Manufacturing PMI
9:30AM UK Flash Services PMI