Euro Finds Support as Rate Expectations Shift
The European Central Bank kept interest rates unchanged yesterday, as anticipated. While the statement maintained a cautious, data-dependent tone, the overall language was less dovish than markets had feared. During the press conference, the euro regained ground against the dollar, helped by the absence of any warning over the currency’s recent strength – something that might otherwise have signalled future cuts.
Economic data added to the sense of underlying resilience. The eurozone’s Composite Purchasing Managers’ Index rose to 51 in July, up from 50.6 in June and ahead of forecasts. Manufacturing activity showed continued recovery, reaching its highest level since July 2022, edging closer to expansion territory. Meanwhile, the services sector posted an unexpectedly strong reading of 51.2, suggesting growing momentum across the region.
As a result, expectations for a rate cut at the ECB’s December meeting have eased, now standing at around 74 percent, down from full pricing earlier in the summer. This repricing offers the euro some fundamental support, particularly as EUR/USD hovers near 1.18. Any further progress towards formalising a trade agreement with the United States could reinforce this trajectory, even if the direct impact on the exchange rate remains limited.
For now, focus remains on incoming US macroeconomic data. While the euro has benefited from improved sentiment and reduced rate cut pricing, a clearer picture from the United States will ultimately shape direction in the months ahead.
Pound Slips Amid Mixed UK Data
Retail sales in the United Kingdom rose by 0.9 percent in June, bouncing back from May’s steep 2.8 percent drop. The increase, though slightly below expectations, was helped by warmer weather and signs of a modest pick-up in consumer spending.
However, sterling came under renewed pressure following a weaker set of PMI figures. The services index fell to 51.2 in July, down from 52.8, reflecting softer hiring as businesses responded to increased payroll costs and higher minimum wages introduced earlier in the year. These figures align with broader evidence of a cooling labour market, including official payroll data and recent employer surveys.
Despite the slowdown, cost pressures remain elevated. Input costs, particularly in food and hospitality, continue to rise, pointing to lingering inflationary forces that complicate the policy outlook for the Bank of England. With both slowing growth and persistent inflation at play, another divided vote is likely at the central bank’s next meeting. A 25 basis point cut remains the most widely expected outcome.
From a currency perspective, GBP/USD failed to stay above its 21-day moving average, suggesting that this week’s mild rebound may be running out of steam. The pair continues to be heavily influenced by dollar sentiment, with limited domestic support following recent UK data.
Meanwhile, GBP/EUR slipped below €1.15 for the first time since late last year. The pound has now weakened in seven of the past nine weeks, falling around 3.5 percent as markets increasingly expect a more dovish stance from the Bank of England compared to its European counterpart. With the eurozone showing signs of stability and the ECB potentially nearing the end of its easing cycle, this policy divergence could keep the pound under pressure through the rest of the summer.
Dollar in Limbo as Markets Wait for a Catalyst
The dollar drifted lower this week as investors searched for direction in a quiet macroeconomic calendar. While the overall picture remains one of resilience, particularly in the labour market, the greenback struggled to find sustained momentum.
Applications for unemployment benefits fell by 4,000 to 217,000 in the week ending 19 July – the lowest level since mid-April – underscoring the ongoing strength of the job market. However, this encouraging data was not enough to offset unease triggered by weaker-than-expected economic releases earlier in the week. Figures for manufacturing activity and existing home sales disappointed, setting the tone for daily declines in the dollar index.
The dollar did recover briefly on Thursday following the strong jobless claims report, rising by 0.3 percent, but gains were tempered by weaker-than-expected new home sales later in the day. In the end, the dollar closed the session higher but remains stuck in a broader range.
For now, the currency is holding above the 1 July low of 96.377 and sits between support at 97.000 and resistance near 98.500. With limited movement in recent days, attention is now firmly on upcoming economic events – including July’s job report, GDP figures, PCE data and the Federal Reserve’s next policy decision. These releases are likely to provide the clearer direction that markets are waiting for.
This week serves as another reminder that macroeconomic data continues to outweigh headlines, policy speculation and even trade developments in shaping currency moves. Until a decisive signal emerges, the dollar remains in a holding pattern.
