Sterling steadies ahead of BoE decision, but outlook remains cloudy

Sterling regained some ground late last week, snapping a six-day losing streak against the US dollar. GBP/USD edged closer to the $1.33 mark, eyeing a break above the 100-day moving average that could pave the way for further near-term gains. Against the euro, however, the pound slipped back below €1.15 following its sharpest daily decline since April.

While sterling continues to react strongly to global risk sentiment, domestic events are now coming into sharper focus. This Thursday, the Bank of England is widely expected to cut interest rates by 25 basis points, bringing the benchmark rate down to 4%. However, the outlook beyond this week remains uncertain.

The UK labour market is showing increasing signs of strain. Payrolled employment has fallen in seven of the last eight months, and the jobless rate is creeping up. Although the bulk of the weakness is centred in hospitality – a sector under pressure from the recent rise in the National Living Wage and changes to payroll taxation – broader signs of stress remain limited for now.

Nevertheless, the BoE finds itself walking a tightrope. Inflation, especially within services, is proving stubborn. Annual services inflation remains stuck at 4.7%, marginally above the Bank’s own May projections. Some of this pressure is expected to ease in time due to rent dynamics and tax-related base effects, but significant disinflation is unlikely before next spring due to the timing of price resets.

Headline CPI has also ticked up to 3.6%, with food prices once again overshooting expectations. That could prompt the Bank to slightly revise its inflation forecasts upward. With inflation hovering in a range that could risk becoming entrenched, the MPC may hesitate to accelerate the pace of easing – even as growth falters.

The committee itself appears divided, with a three-way split likely: some members inclined to keep rates unchanged, others leaning towards a 25bp cut, and a few advocating for a more aggressive 50bp reduction. For markets, this uncertainty leaves the pound in a holding pattern. Near the €1.15 level, GBP/EUR looks broadly fairly valued based on current interest rate differentials.

 

US jobs shock sparks market turmoil

Despite a packed week of political headlines, trade developments, and central bank meetings, it was Friday’s US employment data that truly shook markets and triggered a sharp correction in the dollar.

The greenback slid dramatically, alongside Treasury yields, after July’s nonfarm payrolls missed expectations by a wide margin. The dollar index suffered its steepest one-day fall since late May as investors rapidly recalibrated their expectations for US growth and monetary policy.

While the headline miss alone was enough to raise eyebrows, it was the staggering downward revision to June’s figures that really unnerved traders. The initially reported 147,000 jobs added was slashed to just 14,000 – a revision of 133,000, the largest since the pandemic era and, in percentage terms, the biggest adjustment since 2017. The three-month average gain has now fallen to only 35,000, the weakest pace since 2020.

Adding fuel to the fire, President Trump publicly claimed the data had been manipulated and responded by sacking Erika McEntarfer, head of the Bureau of Labor Statistics. The move has raised serious concerns over the politicisation of federal data and the potential erosion of trust in key economic indicators.

The jobs disappointment has cast significant doubt over the narrative of resilient US economic strength, a view that had buoyed equities to new highs earlier in the week. With the labour market evidently softer than previously thought, markets are now pricing in an over 80% chance of a Federal Reserve rate cut in September. The dollar’s retreat reflects this shift in sentiment, with traders once again bracing for a lower-for-longer scenario.

 

Euro rallies as dollar falters

The euro seized on the dollar’s weakness, recording its strongest one-day gain since April and recovering much of the prior week’s losses. From a technical standpoint, EUR/USD bounced convincingly off key support levels, including the 21-week and 100-day moving averages.

Despite modest declines in July, the shared currency remains on solid footing this year. A combination of softening US data and renewed political tension surrounding the Fed has opened the door for the euro to revisit previous highs. A return to the $1.18 area now looks more feasible than it did just a few weeks ago.

Trump’s aggressive tariff rhetoric and his ongoing campaign to pressure the Fed into cutting rates have added to investor jitters. In contrast, the eurozone’s relative policy stability is making the single currency increasingly attractive as a hedge against US uncertainty.

If the Federal Reserve does bow to political pressure and cuts rates next month