Euro Rises on Fed–ECB Policy Divergence

After suffering its sharpest weekly decline of 2025, the euro has rebounded strongly against the US dollar, recovering nearly half of its recent losses and climbing above its 21-day moving average. This trend indicator has now turned upwards, pointing to short-term bullish momentum.

The turnaround in sentiment has been swift, supported by growing expectations of interest rate cuts from the US Federal Reserve and hopes for progress in Russia–Ukraine ceasefire negotiations.

Economic data from the eurozone has been underwhelming. June retail sales came in below forecasts, July’s private sector activity was revised lower, and German industrial production also missed expectations. Even so, monetary policy divergence remains supportive for the single currency. Markets are now pricing a 60% chance of only one further ECB cut this year, while the Fed is expected to accelerate its easing cycle.

Analysts see $1.18 as a near-term target for EUR/USD, with $1.20 possible by year-end. This outlook could limit further gains in GBP/EUR despite the Bank of England’s hawkish decision yesterday.

The Swiss franc continues to face pressure from US tariffs, the risk of negative interest rates, and reduced safe-haven demand as geopolitical tensions ease. Unless global risks escalate again, selling pressure may persist, even though the franc appears oversold in the short term.

Bank of England’s Hawkish Cut Lifts Sterling

The Bank of England cut interest rates by 25 basis points to 4% yesterday but paired the move with a surprisingly hawkish message, cautioning that monetary policy is becoming less restrictive. Markets now anticipate no further cuts this year and only two more by mid-2026.

The decision followed an unusual two-round vote. Initially, the nine-member committee was split: four members supported a cut, four favoured holding rates, and one advocated a larger 50bp cut. In the second round, the dovish outlier shifted to back a 25bp reduction, resulting in a narrow 5–4 majority.

The vote division reflects a balancing act between rising inflation – forecast to peak at 4% in September – and signs of labour market weakness following increases in payroll taxes and the minimum wage.

Traders were caught off guard by the four members who voted to hold rates. Sterling strengthened alongside gilt yields, with the probability of another rate cut in Q4 dropping from over 90% to below 65%. Two-year gilt yields saw their largest daily rise in a month, adding near-term support for the pound.

Nevertheless, the UK still faces stagflation risks. Services inflation remains stubbornly high, GDP contracted in both April and May, and the real yield advantage could narrow. GBP/USD has risen for five consecutive sessions, moving back above $1.34, while GBP/EUR is set for its strongest week in seven.

US Tariffs, Fed Outlook, and Corporate Earnings Divide

Stephen Miran – a key architect of the Trump administration’s protectionist trade policies – will temporarily join the Federal Reserve Board. His appointment adds another dovish voice to debates over whether tariffs represent a one-off price shock or a lasting source of inflation. With markets focused on slowing growth, traders are increasingly pricing in the possibility of a September rate cut.

Speculation over the next Federal Reserve Chair is also intensifying, with Governor Chris Waller – a known dove – emerging as a potential frontrunner. The US dollar remains soft following new tariff announcements and broader trade uncertainty.

Earnings season is highlighting a clear divide in corporate performance. S&P 500 results are tracking 9% above forecasts, but gains are heavily concentrated in the technology sector, where the so-called “Magnificent Seven” have reported average annual earnings growth of 26%.

Manufacturing, however, is struggling, particularly the automotive sector. GM reported a $1.1bn tariff impact, Ford $800m, Stellantis warned of up to €1.5bn in costs, and Toyota revealed a $3bn quarterly hit. These results underline how trade policy is weighing heavily on industrial firms, even as the technology sector drives broader market gains.

Next Week: US Inflation in the Spotlight

Attention now turns to June’s US consumer price index. Economists expect a 2.8% year-on-year increase, with a 0.2% monthly gain. A higher reading could reignite stagflation concerns and spark volatility in financial markets.

The release follows a weaker-than-expected US jobs report and comes after President Trump removed BLS Commissioner Erika McEntarfer, adding a political dimension to upcoming economic data.

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