Trade Truce Lifts Global Markets as US Inflation Data Takes the Spotlight

USD

The United States and China have agreed to extend their trade truce for a further 90 days, ensuring tariffs remain unchanged until November. The move has been welcomed by investors, with Asian equity markets rallying and both European and US futures trading higher. Attention now turns to today’s release of the US Consumer Price Index (CPI).

Analysts remain alert for signs that inflationary pressures are resurfacing, warning that the effects of tariffs could increasingly feed through to businesses and consumers in the coming months. The June Personal Consumption Expenditures (PCE) index – the Federal Reserve’s preferred inflation gauge – already showed a marked increase. Today’s core CPI is expected to rise by 0.3 per cent, the sharpest monthly gain since January, pushing the annual rate to 3.1 per cent, well above the Fed’s 2 per cent target.

This presents the Fed with a policy dilemma. Rising inflation typically argues against cutting interest rates, yet recent labour market data point to a slowdown in hiring. Interest rates have been held steady all year as policymakers seek clarity on inflation trends and the economic impact of tariffs. Weaker employment data may strengthen the case for monetary easing. Politically, this is the first CPI report since President Trump dismissed Erika McEntarfer, head of the Bureau of Labor Statistics, after a disappointing jobs release – sparking questions over the reliability of official economic figures.

The US dollar’s recent rebound is losing momentum. The dollar index is struggling to sustain gains and remains under pressure from fiscal concerns, raising the possibility of a prolonged period of weakness.

GBP

Sterling has edged higher against the US dollar following the latest UK labour market figures, although market reaction was muted as results were broadly in line with forecasts. Wage growth slowed more than expected, with average weekly earnings up 4.6 per cent versus 4.7 per cent anticipated and down from 5 per cent previously. Unemployment held at 4.7 per cent, while wage growth excluding bonuses remained at 5 per cent, indicating persistent pay pressures. Private sector earnings eased to 4.8 per cent and the number of payrolled employees fell for the sixth consecutive month – the weakest run since the pandemic.

Job vacancies have now declined for the 37th consecutive period, and the ratio of vacancies to unemployed workers has dropped, signalling a looser labour market. Despite signs of cooling, wage growth remains above the level consistent with the Bank of England’s inflation target.

This backdrop supports the Bank’s recent decision to keep interest rates on hold while retaining a hawkish stance, suggesting cuts are unlikely in the near term. However, if pay pressures ease more quickly than expected, sterling’s support could diminish.

EUR

The euro briefly dipped yesterday, testing support at $1.1600, but has stayed within the $1.1600–$1.1670 range seen in recent sessions. Following the disruption from US labour market data and the dismissal of the head of the BLS, the euro regained momentum and is now up 1.7 per cent for the month to date. Nevertheless, confidence in the eurozone’s ability to secure a favourable trade agreement remains low.

This creates a muted outlook for both the euro and the dollar, with further EUR/USD gains likely requiring a clear market catalyst. In the meantime, price movements have remained relatively range-bound.

Short-term risks lean towards further euro upside. The currency continues to find underlying support, and narrowing two-year yield differentials between the eurozone and the US reflect expectations that the Federal Reserve could resume rate cuts before long. This environment provides sentiment-driven support for the euro during market recoveries.

Market outlook

The immediate focus for investors will be today’s US CPI release, which is expected to set the tone for dollar performance over the coming weeks. For sterling, wage growth dynamics will remain key in shaping Bank of England policy expectations. In the eurozone, sentiment remains fragile, but narrowing interest rate differentials offer scope for further euro gains if US dollar weakness persists.

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