Sterling finds breathing room amid easing rate cut bets

Sterling began the week on firmer footing, rising against most major peers as markets recalibrated their expectations for Bank of England rate cuts. While a 25 basis point reduction is still largely priced in for September, traders have started to pare back expectations for multiple cuts this year, creating space for the pound to regain some ground, particularly if upcoming data outperforms, as it did last week.

This week, the focus will be on Thursday’s flash PMIs and Friday’s retail sales figures. Resilient services and a rebound in consumer activity could provide fresh impetus for sterling, especially if they challenge the market’s cautious policy outlook.

Against the dollar, GBP/USD touched a one week high at $1.3490 on Monday, pushing beyond the recent tight trading band between $1.3380 and $1.3450. While the pair remains nearly 2 percent lower for the month, renewed BoE hawkishness and broader dollar uncertainty helped drive the move. However, $1.3500 continues to act as a firm resistance level, with repeated attempts failing to produce a clean break.

Technically, the pair remains below its 21 and 50 day moving averages, suggesting that a more decisive catalyst is needed to reignite sterling’s 8 percent year to date uptrend. With this week’s calendar relatively light, such a spark is unlikely to materialise unless data meaningfully surprises.

For now, sterling is benefitting from a repricing of domestic policy expectations and global uncertainty around the dollar. A strong run of data, coupled with a steady tone from Governor Bailey next week, could pave the way for renewed gains into August.

 

Euro eyes breakout but still needs a catalyst

The euro attempted to push higher at the start of the week, with EUR/USD moving back above its 21 day moving average but failing to close the session above it. This reflects ongoing hesitancy among traders. A sustained move above this level would offer technical support and may trigger renewed euro buying, potentially setting the stage for a return toward the 2025 highs.

However, headwinds persist. Firm US yields and geopolitical uncertainty continue to limit euro upside, and there has been no decisive shift in the market narrative. A close above $1.17 this week would be encouraging, though further gains will likely require support from incoming data or a broader shift in sentiment.

As interest rate differentials return to the spotlight, the Fed’s apparent willingness to remain on hold through the third quarter contrasts with a European Central Bank nearing the end of its own easing cycle. This divergence may offer longer term support for the euro, particularly if the Fed adopts a more dovish stance heading into late 2025 and beyond.

This week’s ECB meeting is not expected to produce surprises. With eurozone inflation near target and trade tensions still developing, policymakers are widely expected to leave rates unchanged. Volatility pricing reflects this calm, with little evidence of investor hedging ahead of the meeting.

In the near term, EUR/USD is likely to remain rangebound unless expectations shift significantly. The next major turning point may come on 1 August with the expected update on tariffs. Until then, a subdued ECB and stable PMIs could keep euro momentum contained.

 

Dollar pulls back as resistance holds

The US dollar index declined by approximately 0.7 percent on Monday, slipping below the 98 mark after several failed attempts to break above the 98.500 resistance level since Friday. The pullback occurred during the Federal Reserve’s communications blackout period, with markets still digesting dovish remarks from Fed Governor Christopher Waller at the end of last week. His comments have reignited debate over the broader tone of the FOMC and the extent of political pressure facing Chair Jerome Powell.

The dollar’s softness also reflects uncertainty as the tariff deadline nears. Although the consensus points toward a more modest final tariff package, the lack of definitive updates is weighing on investor confidence. Despite showing more resilience than risk assets to trade-related noise, the dollar remains constrained by the absence of progress.

It is worth noting that the dollar’s recent weakness appears more related to hedging activity than to outright selling of US assets. On Monday, the S&P 500 recorded another all time high as investors continue to seek earnings stability amid tariff concerns. This builds on strong results from major US banks last week. The focus now shifts to the roughly 20 percent of the index reporting earnings this week, including Tesla and Alphabet on Wednesday.

Supporting this narrative, Treasury data released last week showed the largest monthly foreign purchases of US long term securities in years, despite heightened uncertainty at the time. This suggests continued investor appetite for US assets, reinforcing the view that dollar moves are currently driven by positioning rather than capital flight.

With limited data releases and no Fed commentary expected, the DXY is likely to consolidate between 97.700 and 98.500. As long as the index holds above 97.700, the broader technical structure remains constructive. A sustained break below that level, however, would signal a continuation of the broader downtrend seen so far this year.