Pound pressured by dovish signals
Sterling had recently flirted with the $1.38 level, reaching a year-to-date peak of $1.3789 on Monday, before retreating on the back of stronger-than-expected US macroeconomic data. The GBP/USD pair reversed course later in the session, falling over 0.3% from its high and opening Tuesday’s trading within the $1.3730–$1.3750 range.
While the initial move reflected renewed dollar strength, the more decisive factor came from the Bank of England. Governor Andrew Bailey struck an overtly dovish tone—first in an interview with CNBC, then during remarks at the ECB’s forum in Sintra—declaring that “the direction of interest rates is downwards.” His comments stood in sharp contrast to the relatively cautious stances adopted by the ECB and Federal Reserve.
Bailey highlighted a weakening UK labour market and growing global uncertainty as key headwinds for investment and economic momentum. His focus on downside risks—rather than inflationary persistence—sent a clear message to markets: rate cuts are now firmly on the table. As a result, market pricing for an August cut jumped to 84%, up from 78% before his comments.
Surprises among global currencies
Among G10 currencies, the Swedish krona has emerged as the standout performer in the first half of the year, appreciating nearly 17% against the US dollar. This rally came despite the Riksbank cutting its policy rate by another 25 basis points in June, bringing it down to 2%. The move underscores that interest rate differentials aren’t the dominant factor—particularly with US rates still elevated.
Instead, the krona’s strength reflects several interwoven dynamics: a broadly weaker dollar, the krona’s tight correlation with the euro, and a catch-up rally from previously undervalued levels, as noted by both the IMF and Riksbank. Renewed investor confidence in Sweden’s pro-industrial policy direction and speculative inflows have added further momentum, indicating a deeper structural realignment rather than short-term yield chasing.
The euro has also benefited, rising 14% year-to-date and inching closer to the $1.20 level. The Swiss franc continues to draw strength from its safe-haven status.
Euro rally falters on robust US data
Earlier this week, the euro's rally lost steam in late London trading, with EUR/USD slipping back into the $1.17 range. The retreat followed stronger-than-expected US economic releases—particularly the JOLTS jobs report, which showed vacancies climbing to 7.77 million (vs. 7.30 million forecast), along with a drop in layoffs and a rise in voluntary quits. The ISM Manufacturing Index also surprised to the upside, increasing to 49 from 48.8.
Adding further weight to the dollar, Federal Reserve Chair Jerome Powell, speaking at the ECB Forum in Sintra, maintained a data-driven approach and did not signal any near-term rate cuts—despite acknowledging that tariff-driven price pressures could soon begin to show in inflation prints. Markets had perhaps been hoping for a more dovish pivot; none materialised.
In the eurozone, ECB President Christine Lagarde echoed a similarly cautious line, reiterating a meeting-by-meeting stance with no fresh policy direction. Headline inflation in the bloc ticked up slightly to 2.0% (from 1.9%), while core inflation held steady at 2.3%, amid a mixed set of national inflation prints.
While geopolitical tensions have eased, tariffs remain a lingering risk to the inflation outlook. That said, both EU and US officials remain confident a negotiated resolution is within reach, and a worst-case scenario—such as 50% tariffs on EU imports—looks increasingly unlikely.
Encouragingly, consumer expectations are softening. According to the ECB’s Consumer Expectations Survey, one-year inflation expectations fell to 2.8% (vs. 3.1% forecast), and the three-year outlook eased to 2.4% (vs. 2.5%).
Unless incoming US labour data (ADP later today, non-farm payrolls Thursday) shift sentiment, EUR/USD is likely to remain below the $1.18 threshold and could drift towards the $1.16 handle.
Mixed signals from US manufacturing
As Q3 gets underway, the latest ISM Manufacturing Index offers a mixed picture of US industrial activity. The index nudged up to 49 in June, slightly above May’s 48.5. While still signalling contraction, the slower pace of decline suggests tentative stabilisation. Notably, the production sub-index rebounded to 50.3 from 45.4, and inventories improved. However, new orders, employment, and backlogs all showed deeper contractions, underscoring lingering demand-side fragility.
Inflationary pressures remain pronounced. The prices paid component rose to 69.7—its highest level in nearly three years—driven largely by rising input costs and tariff effects. Manufacturers have responded cautiously, trimming staff and scaling back forward orders until the demand outlook becomes clearer.
Though manufacturing represents roughly 17% of US GDP, it often serves as a bellwether for broader economic trends. At present, the signals are ambiguous: while there are isolated signs of resilience, the sector continues to face pressure from both cost inflation and policy uncertainty, making firms hesitant to commit to new investment or hiring.
