Sterling shrugs off stronger growth as global drivers dominate

Market overview

Currency markets remain caught between softer US data, resilient global risk appetite and lingering inflation risks from energy. July’s US CPI release reinforced the view that price pressures are gradually cooling, while last week’s weaker employment figures have also encouraged some trimming of Federal Reserve tightening expectations. The reaction, however, has been measured rather than decisive.

Across G10 FX, carry remains an important differentiator. Sterling continues to benefit from relatively attractive UK yields, commodity currencies retain support from elevated energy prices, and the euro is struggling to capitalise on firmer domestic data. Meanwhile, equity markets remain close to record levels and FX volatility is subdued, keeping higher-beta currencies supported.

The broader picture is therefore one of consolidation rather than conviction. Markets are reducing some hawkish Fed bets, but geopolitical risks, oil prices and several major US data releases still stand between current pricing and a more meaningful shift in the dollar trend.

USD: Softer inflation chips away at Fed hawkishness

US inflation offered few surprises in July. Headline CPI eased to 3.4% from 3.5%, while core inflation slipped to 2.5% from 2.6%, matching February’s five-year low.

Combined with last week’s softer labour market report, the data have reduced expectations for a September Fed hike. Markets have moved from roughly even odds to pricing around a 35% probability, pushing short-dated Treasury yields lower and steepening the curve.

Longer-term yields remain more complicated. The 10-year Treasury term premium has risen sharply since July as investors demand greater compensation for inflation uncertainty linked to the energy shock, alongside lingering questions over the Fed’s policy outlook. A further bear-steepening of the US curve would remain an unfavourable backdrop for the dollar.

For now, however, the market wants more evidence before committing to a larger dovish repricing. DXY remains confined to the 99.50 to 100.00 area, putting today’s US PPI release firmly in focus given its relevance for the Fed’s preferred PCE inflation measure.

GBP: Carry and risk appetite keep sterling supported

Sterling continues to trade primarily as a function of global carry, energy prices and risk sentiment rather than domestic economic news.

The pound remains vulnerable against commodity-linked currencies such as the NOK and CAD, which benefit from higher energy prices. Against the dollar, however, softer US labour and inflation data have offset some of that pressure by pulling Fed expectations and Treasury yields lower. GBP/USD has consequently held around 1.35, close to its long-run average.

UK yields also remain among the more attractive in the G10, giving sterling a carry advantage over traditional funding currencies such as the yen and Swiss franc, as well as a modest yield edge over the euro.

Supportive global risk conditions are amplifying that advantage. Equities remain close to record highs, while realised and implied FX volatility remain unusually low. That environment typically favours sterling's higher-beta and carry characteristics.

Domestic data have had limited influence. June GDP rose 0.3%, helping Q2 growth reach 0.4%, yet sterling showed little reaction. The muted move underlines how strongly external factors are currently driving the currency. UK political developments will also attract attention today, with the Clacton by-election adding another event risk to the domestic calendar.

EUR: Domestic strength struggles to move the needle

EUR/USD remains anchored near 1.1550 despite benign US inflation data and a run of stronger-than-expected eurozone releases.

Markets remain reluctant to unwind Fed hawkishness aggressively while geopolitical tensions and energy risks persist. At the same time, expectations for next month's ECB meeting are moving towards a fully priced 25bp rate increase, leaving less room for the euro side of the equation to generate another meaningful leg higher.

That places the burden on the dollar if EUR/USD is to make a sustained move towards 1.16. Today's US PPI print therefore represents the immediate catalyst. A stronger-than-expected reading would likely weigh on the pair, while an uneventful release should leave EUR/USD contained around the 1.1520 to 1.1560 area into the end of the week.

Looking ahead

• US PPI: The immediate focus for markets, particularly components feeding into the Fed's preferred PCE inflation gauge.

• Fed repricing: Further soft US data could pull September hike expectations lower and add pressure to the dollar.

• Jackson Hole: An important opportunity for policymakers to shape expectations ahead of September.

• Energy and geopolitics: Oil prices and developments around the Strait of Hormuz remain key inflation and FX risks.

• EUR/USD: Likely to remain range-bound unless US data provide a clearer catalyst.

• Sterling: Carry and global risk sentiment remain more influential than UK-specific data for now.