UK economic slowdown hits Pound as output shrinks again

The British Pound weakened following an unexpected reduction in the UK’s economic activity during May. For the second month running, the UK economy has contracted, creating fresh pressure on the Pound’s value.

Sterling fell to 1.1595 against the Euro after the Office for National Statistics revealed that GDP slipped by 0.1% compared to April’s fall of 0.3%. This reading was disappointing for analysts who had predicted a modest rebound of 0.1% growth. Against the US Dollar, the Pound eased to 1.3541.

A closer look at the figures offers little comfort to the Chancellor of the Exchequer, Rachel Reeves:

Industrial production continued its downward trajectory, registering a 0.9% monthly decline in May after April’s 0.6% fall. This result was worse than the expected flat reading. The picture was bleaker still for manufacturing, which contracted by 1.0% month-on-month, deeper than April’s 0.9% drop and far below projections for only a slight dip.

One area of resilience came from the services sector, the largest contributor to the UK economy. It managed a small expansion of 0.1%, driven by solid advances in information and communication, which rose 2.0%, and legal services, which jumped by 6.1%. However, these gains were partly offset by a 2.7% slide in retail activity.

Markets believe this set of results increases the likelihood that the Bank of England will accelerate plans to cut interest rates, a factor weighing further on the Pound’s performance. This disappointing data emerges as concerns grow over the sustainability of the UK’s public finances. Fluctuations in the debt market are indicating that borrowing levels are becoming increasingly difficult to manage.

Chancellor Reeves faces an urgent need for stronger economic growth to boost tax revenues. Without this uplift, she may have no choice but to raise taxes, a move that could worsen the slowdown already under way.

Trade tensions overshadow FX as markets search for clarity

With few significant data releases influencing foreign exchange markets this week, investors were left to focus largely on the torrent of trade tariff developments. This presented an opportunity to witness more plainly a crucial transition in what is powering recent market moves. Rather than relying purely on sentiment, traders are increasingly looking for concrete confirmation that U.S. policy risks are now the primary source of momentum.

Perhaps the most notable illustration of this unpredictability emerged when Donald Trump threatened to impose a 50% tariff on Brazilian imports. The threat appeared motivated purely by domestic political considerations related to the treatment of former President Jair Bolsonaro. This episode underscored the administration’s inclination to weigh non-economic factors when determining trade policy, despite the somewhat surprising reality that the United States currently enjoys a trade surplus with Brazil.

Even so, the dollar inched higher, while both the euro and pound extended their recent losses. As discussed in yesterday’s analysis, from both a technical and fundamental standpoint, this waning momentum has already been taking shape. So far this week, the euro and pound have each dropped by approximately 1% against the dollar.

Looking forward, any attempt to rekindle these rallies will depend on clear macroeconomic evidence that the U.S. economy is indeed being undermined by the impact of tariffs. Only such proof would be likely to revive the sentiment-driven wave of dollar selling seen earlier in the year before the summer months. At present, the uncertainty over whether these measures will be enacted no longer seems sufficient to lift the euro and pound further.

If the U.S. economy continues to show resilience and inflation remains stubbornly high, dampening expectations for near-term Federal Reserve rate reductions, a further correction lower for the euro and pound is becoming an ever more probable outcome. The release of U.S. inflation figures next week will be crucial in shaping this view.

Euro remains under pressure as fresh drivers fail to materialise

The trade discussions between the United States and the European Union have yet to deliver any tangible progress, a factor that contributed to the euro drifting modestly lower yesterday, closing with a marginal loss of 0.05%. Nevertheless, the currency showed some resilience during Asian trading hours, buoyed by a flare-up in trade frictions after President Trump declared that a 50% tariff would be imposed on Brazilian imports from 1 August.

Even so, the mere threat of punitive measures seems to have lost much of its potency in drawing meaningful support for the euro at the dollar’s expense. The single currency now appears to be lacking in compelling reasons to climb further. Investors are increasingly waiting for more disappointing news from the US to justify any renewed buying of euros. With the market having largely absorbed expectations for both the European Central Bank and the Federal Reserve, and policymakers on both sides adopting a wait-and-see stance, the euro is likely to continue its gradual decline and hover close to the $1.17 support threshold until more decisive developments occur.

Yesterday’s remarks from ECB officials Lane, Guindos and Nagel underscored a cautious approach. Their statements made clear that the central bank sees no pressing need to ease policy further, preferring instead to rely on incoming economic data and to assess conditions at each meeting. This approach is especially relevant given the uncertainty surrounding global trade relations.

Across the Atlantic, a similarly guarded sentiment emerged in the minutes of the Federal Reserve’s recent meeting, which highlighted concerns that fresh tariffs could contribute to rising inflationary pressures.

As traders place greater weight on macroeconomic releases rather than headlines about tariffs, attention now turns to today’s US jobless claims and, more significantly, next week’s consumer price data for June. Should these figures come in below expectations, they could revive speculation of a softer policy stance from the Federal Reserve. Such a shift, which had faded following robust non-farm payrolls, could deliver much-needed momentum to a euro rally that has recently shown clear signs of losing steam.

Sterling edges lower as traders await fresh data

Much like the euro-dollar pairing, the pound-dollar exchange rate has retreated in recent sessions, slipping back from last week’s peak of $1.3790. Yesterday, the pair briefly touched support near the 21-day moving average, a move that hints at the possibility of the rally running out of steam.

Although technical indicators point to a loss of upward momentum, it remains premature to declare a definitive shift towards a sustained decline. The Relative Strength Index, which measures the pace and scale of price changes over a fortnight, has eased towards a neutral reading of 50, down from 70 at the end of June. This moderation suggests that the bullish forces propelling sterling have weakened, but have yet to fully unwind.

Sterling’s struggle to gather momentum, even during a week when the UK was expected to stand out as one of the few nations securing a trade agreement with the United States, reflects a growing appetite among investors for solid economic evidence rather than optimistic sentiment alone. A comparable pattern has been developing in the euro-dollar pair, where enthusiasm has similarly given way to caution.

Attention is now directed towards forthcoming UK economic reports, with GDP figures, manufacturing output, and industrial production data all on the horizon. While industrial and manufacturing production are forecast to remain slightly negative on a monthly basis, both measures are generally expected to show signs of recovery. As for GDP, analysts foresee a modest rise of 0.1% in May, representing a rebound after April’s 0.3% decline.

Trade tensions test market nerves but resilience persists

No new trade deal has emerged this week. Yesterday, Trump insisted there would be no more extensions past 1 August, which was already another delay in itself, and threatened steep tariffs of 50% on copper and 200% on pharmaceuticals. Despite these dramatic threats, the S&P barely moved and the dollar strengthened, showing markets have grown accustomed to Trump’s brinkmanship.

America’s trade policy has remained controversial, from its questionable tariff calculations to using levies as bargaining chips. The administration’s insistence that the trade deficit is an urgent problem has also been criticised as an oversimplification.

The main concern is that if such sweeping policies are handled poorly, the fallout could be severe. This was evident when the dollar weakened in April after new tariffs were announced. Yet in recent days, the economy has shown resilience, easing fears and supporting the dollar, which has gained about 0.4% this week.

While worries about the outlook persist, familiarity with this combative trade strategy has steadied markets. Technical factors also play a role: the dollar is much more oversold than a few months ago, setting the stage for a possible rebound. Combined with hopes of deals to reduce tariffs, there are reasons to expect a near-term recovery.

Euro rally loses steam as short-term caution grows

The euro’s earlier surge has lost momentum and is likely to stay under pressure throughout the rest of the week. After starting the month with notable strength and even managing a brief climb above the $1.18 level, the rally soon ran out of steam. The EUR/USD pair is currently trading a little more than 0.5% lower since the start of the month, although it still boasts an impressive rise of roughly 13% so far this year.

Market sentiment in the near term has become more wary. One-week and one-month risk reversals have shifted towards euro puts, showing that bearish positions are now outpacing bullish ones. This reflects mounting anxiety about short-term threats to the currency. By contrast, risk reversals with longer maturities continue to display a positive bias, indicating that investors remain broadly hopeful about the euro’s medium-term trajectory.

Whatever the ultimate scale of tariffs imposed, the prevailing view is that the European Union is more exposed to economic harm than the United States. This is largely because of its heavier reliance on exports and comparatively softer economic fundamentals. Such concerns have encouraged a more negative short-term stance, even though positioning further out on the horizon still highlights the persistent vulnerabilities facing the dollar, which in turn underpins a constructive outlook for the euro once the immediate uncertainty recedes.

Nevertheless, the longer-term optimism towards the euro, as seen in options pricing, is fundamentally tied to structural weaknesses in the U.S. economy. As has been argued previously, unless international investors continue to see strong incentives to reduce their exposure to American assets, capital flows into Europe could begin to falter.

Pound under pressure as debt worries intensify

The British Pound has slipped once again as concerns about the country’s finances return. UK bond yields surged and sterling declined after the Office for Budget Responsibility (OBR) released a report warning that Britain’s debt path is becoming unsustainable.

The OBR’s Fiscal Risks and Sustainability update stated that efforts to steady the public finances have achieved only limited success, leaving the UK with some of the highest debt and borrowing costs among developed economies. The publication came days after markets reacted badly to the government’s decision to abandon welfare reforms that would have saved a modest £5 billion a year.

Last week, Rachel Reeves, the top finance official, was visibly upset in Parliament, fuelling speculation over whether she would keep her position. This uncertainty unsettled investors, leading to a decline in the Pound and a spike in gilt yields, which are widely seen as early warning signs of fading confidence in the UK’s fiscal outlook.

The OBR now expects borrowing to exceed 20% of GDP and debt to surpass 270% of GDP by the early 2070s if policies remain unchanged. While rising yields often attract investors seeking better returns, they can also signal growing fear over default and inflation risks.

Pensions spending poses a particular challenge. It currently stands at £138 billion, or 5% of GDP, and could reach nearly 8% by the 2070s. The cost of the triple lock guarantee alone has trebled in forecasts.

These pressures risk sending a clear message to currency markets that Britain’s finances may be on an increasingly shaky footing, putting the Pound at further risk.

Tariffs extended as Trump hints at fresh talks

During yesterday’s barrage of tariff-related reports, several key developments emerged. Letters sent to trade partners confirmed tariff rates that closely resembled those publicised on Liberation Day. While the measures had been scheduled to take effect on 9 July, the implementation has been discreetly delayed until 1 August. Even this new date appears negotiable, as Trump remarked it was not “100 percent firm.” The underlying signal is unmistakable: Trump remains prepared to resume discussions with countries prepared to offer further concessions.

As markets digested the prospect that these announcements were part of Trump’s habitual approach—aggressive statements followed by willingness to bargain—select currencies came under renewed strain. The yen and South Korean won, alongside commodity-focused currencies such as the Australian and Canadian dollars, lost up to 1 percent. Nonetheless, they later regained ground in the Asian trading hours, as optimism re-emerged and traders re-evaluated the likelihood of constructive negotiations.

These weaker currencies share one feature: negotiations with Washington have reached an impasse, with scant evidence of progress. Meanwhile, the U.S. dollar outperformed, pushing the dollar index (DXY) up by 0.5 percent—its most robust single-day advance since the mid-June flight to safety.

Turning to the euro, EUR/USD slipped by nearly 0.6 percent at one stage but staged a recovery as the European Union retained a firm negotiating stance. EU officials are working to finalise an initial trade agreement with the U.S. this week, hoping to secure a 10 percent tariff threshold before the August deadline. Attention is now shifting to whether the EU–U.S. discussions will proceed as planned. Should talks prove more fraught than anticipated, EUR/USD could find support near $1.1700.

Alongside these negotiations, the administration has issued further letters outlining updated tariff schedules from 1 August. These apply to Malaysia, Kazakhstan, South Africa, Laos and Myanmar. Some rates have been trimmed: Myanmar will drop from 44% to 40%, Laos from 48% to 40% and Kazakhstan from 27% to 25%. South Africa remains unchanged at 30%, while Malaysia increases slightly to 25%, aligning with Japan’s rate.

Beyond the rate changes, the more consequential development is the three-week postponement to the deadline, allowing extra time for bargaining and the possibility of sealing new agreements. Notably, no such letters have been addressed to Europe or Canada, a detail that has not escaped traders’ notice. Volatility surged immediately. Equities pulled back by nearly 1 percent and the dollar gained around 0.3 percent on the news.

Altogether, these events illustrate how intricate U.S. trade policy has become. The administration’s ambition to finalise a large number of deals within 90 days is increasingly confronting the reality of prolonged discussions. With the clock ticking towards 1 August, the coming weeks may prove pivotal for nations hoping to avoid steeper trade barriers.

Sterling falters as fiscal worries grow and tariff revenue props up the dollar

The pound did not escape the turbulence. After climbing to around the 3.5-year high close to $1.3800, GBP/USD reversed direction sharply, falling below the $1.36 mark. This decline reflected renewed momentum behind the dollar in the run-up to the original implementation date, combined with deepening unease about the UK’s public finances.

Fiscal policy has become an increasingly heavy burden for both sterling and the dollar. Bond investors on both sides of the Atlantic are growing more sceptical about the credibility of medium-term fiscal plans. In the United States, the government faces a projected $3.4 trillion deficit stemming from tax overhaul measures. Meanwhile, Britain is grappling with stricter budget constraints, especially in light of last week’s sudden abandonment of Keir Starmer’s welfare initiative, which carried a £5 billion price tag.

Despite these pressures, the dollar enjoys one important advantage: a reliable flow of tariff income. No matter where the final average tariff settles, and despite the continual uncertainty surrounding policy, revenues will remain substantially above levels seen before 2025. Over the next ten years, tariff receipts are forecast to reach $2.3 trillion, even after allowing for reduced trade volumes and a gradual shift towards lower-tariff goods and trading partners.

In an ironic twist, this fiscal cushion lends the dollar more credibility than sterling, suggesting that trade policy rather than political promises may be the primary source of economic stability for the foreseeable future.