Sterling faced significant headwinds last week, with disappointing UK GDP numbers on Friday causing substantial weakness. GBPEUR slipped from 1.16 to 1.15, while GBPUSD dropped more sharply from 1.36 down to 1.34, catching many traders off guard. The pullback in GBPUSD was particularly surprising, as sentiment had broadly expected Sterling’s rally against the Dollar to continue into the summer months. However, the weak economic data out of the UK appears to have temporarily halted Sterling’s upward momentum.
Adding to geopolitical volatility, President Trump announced over the weekend that new tariffs could be applied to the EU and Mexico in August if trade agreements are not reached by then. So far, markets seem somewhat sceptical, viewing these tariff threats as more of a negotiating tactic. Both the EU and Mexico have already indicated a willingness to strike agreements promptly, so major fallout in currency markets remains unlikely at this point. Nevertheless, traders should remain cautious and attentive to developments, as trade rhetoric can swiftly escalate.
Key Economic Data and Events This Week
After a quiet Monday, volatility picks up again from Tuesday onward, with several key economic indicators expected to significantly influence market movements:
Tuesday: China GDP, EU Economic Sentiment, and U.S. Inflation
Tuesday begins with China’s Q2 GDP data release, forecasted to show growth slowing notably to 1% QoQ. While this figure marks a significant deceleration, it could provide some short-term optimism if the data comes in stronger than expected, positively impacting the Chinese Yuan (CNY) and broader market sentiment around Asia-Pacific currencies.
Later Tuesday morning, Eurozone industrial production and Germany’s ZEW Economic Sentiment index will be published. Both releases are anticipated to improve from previous months, providing potential short-term support for the Euro, particularly if these figures surprise positively.
However, the major event Tuesday afternoon will be the U.S. inflation data (CPI), with core inflation expected to rise to 0.3% month-on-month, pushing the annual headline inflation figure to 2.6%; a notable increase from the previous 2.4%. This higher inflation reading could be bullish for the U.S. Dollar, as it reduces the likelihood of near-term rate cuts by the Federal Reserve and reinforces the Fed’s cautious stance on monetary easing.
Wednesday: UK Inflation and U.S. PPI Data
On Wednesday morning, the spotlight returns to the UK, with inflation data expected to remain stable at 3.5%. However, given recent upward inflationary pressures, particularly driven by higher energy and food prices, there is potential for an upside surprise. Traders should remain cautious around this release, as unexpected CPI data could drive significant volatility for Sterling pairs.
In the afternoon, the U.S. releases Producer Price Index (PPI) data, expected to reflect similar upward pressure following Tuesday’s anticipated CPI rise. A stronger PPI could further support the Dollar, adding to confidence in sustained price growth and economic resilience in the U.S.
Thursday: UK Employment and EU Inflation
Thursday brings another important batch of UK economic data with the latest employment figures. Unemployment is expected to remain steady at 4.6%, but average weekly earnings are anticipated to decline slightly to 5% from the previous reading. If earnings growth slows notably, this could suggest weaker consumer spending potential in the UK, further pressuring Sterling.
Shortly thereafter, attention shifts to Eurozone inflation data. Core inflation is projected to remain steady at 2.3%, while headline inflation is expected to increase modestly to 2.0%. Stable to rising inflation figures could lend the Euro some resilience, especially as it keeps the ECB on track regarding its current monetary policy trajectory.
Conclusion: Navigating Continued FX Volatility
With last week’s Sterling weakness and renewed geopolitical uncertainty, markets are likely to remain highly sensitive to this week’s economic releases and any further trade-related announcements from the U.S. administration. Traders and businesses alike should stay vigilant, maintaining well-informed and proactive strategies in response to potential market swings.
GBP/EUR 1.1525 GBP/USD 1.3464 GBP/AED 4.9478
GBP/AUD 2.0516 GBP/CHF 1.0732 GBP/CAD 1.8427
GBP/NZD 2.2496 EUR/USD 1.1669 GBP/ZAR 24.1003