UK inflation heats up, rate cut bets cool down
The British pound’s knee-jerk reaction to this morning’s hotter-than-expected UK inflation report was one of strength. However, as noted yesterday, a stagflationary backdrop rarely supports sustained currency gains — putting the pound’s recent yield-driven rally on increasingly shaky ground.
UK inflation accelerated in July, with the annual rate rising to 3.8%, the highest since January 2024 and above market expectations of 3.7%. That’s up from 3.6% in June, driven largely by a sharp increase in transport costs. Airfares surged 30.2%, pushing overall transport inflation to 3.2%, up from 1.7% the previous month — marking a key source of upward pressure in the latest CPI print.
Not only did the full suite of July inflation figures exceed expectations, but services inflation has returned to 5% — a deeply troubling development for the Bank of England (BoE). UK inflation breadth is widening notably as well. Over 40% of the inflation basket is now running above 4%, with more than 20% exceeding 6% — a sharp shift from last year, when over 40% of components were below the BoE’s 2% target and none were above 6%. This broadening pressure underscores the persistence of inflation and complicates the outlook for monetary easing.
It raises questions over whether the central bank acted prematurely in cutting rates earlier this month. Markets had already scaled back expectations for another rate cut this year, and today’s data has seen the probability of a reduction by December now at around 42%, compared to about 50% as of Tuesday’s close, according to overnight swaps tied to meeting dates.
Dollar steadies as AI hype falters
US tech stocks fell sharply on Tuesday as concerns mounted that enthusiasm around artificial intelligence may be overdone. Nvidia, which recently became the world’s first $4tn company on AI momentum, dropped 3.5%, which dragged the Nasdaq Composite down 1.4%, its second worst day since April’s tariff shock. The US dollar, meanwhile, has steadied, rising by a modest 0.5% against a basket of major peers week-to-date.
After a historically rough first half, the dollar has found some stability, drifting as Fed rate cut expectations ebb and flow. It was cast as the loser in the “sell America” narrative — a sentiment-driven story that lacked substance. In fact, Friday’s TIC data showed foreign holdings of US Treasuries hit a record high in June, directly contradicting the idea that global investors are turning away from US assets due to political volatility in Washington.
Meanwhile, in geopolitics, recent summits have offered a clearer path toward peace in Ukraine, which should, in theory, lift sentiment across Europe and emerging markets — particularly if energy prices stabilize. Still, markets remain understandably cautious, with the most contentious negotiations — notably over territorial issues — yet to be resolved.
This cautious optimism is unfolding in parallel with confidence in the Fed’s willingness to cut rates two or three times this year. Volatility remains low across asset classes, credit spreads are tight, and emerging markets continue to attract inflows. Investors are largely looking past tariff risks and embracing the prospect of stronger global demand, underpinned by looser fiscal policy and monetary easing across major economies.
Against this backdrop, we expect the US dollar’s recent rebound to fizzle out, particularly if today’s Fed minutes reveal broader support for rate cuts. While US macro data remains the primary driver for the dollar, the calendar is light ahead of Thursday’s Jackson Hole Symposium. Recall that last year, Chair Powell used the event to tee up a 50bp cut. Any signal — however subtle — could be enough to shift market pricing and USD positioning.
Euro stuck in low gear
EUR/USD has traded in a narrow range this month, moving less than 0.5% in either direction each session, underscoring the lack of volatility in the world’s most traded currency pair as investors await a fresh catalyst. Despite being up 12% year-to-date, upside momentum has faded in recent weeks, with the pair hovering near its 21- and 50-day moving averages for support.
Markets are watching Thursday’s eurozone PMIs for signs that business sentiment is deteriorating in response to the new US-EU trade deal. The August ZEW survey already flashed a warning: German economic sentiment plunged 18 points to 34.7, with the current conditions index falling to -68.6 — both well below expectations. Analysts cited disappointment over the trade agreement and weak Q2 German growth, particularly in key sectors like chemicals, autos, and engineering. With volatility low and EUR/USD rangebound, any downside surprise in the PMIs could trigger a more defensive market tone.
Still, as markets begin to move past the structural implications of tariffs, growth differentials are re-emerging as key FX drivers. This dynamic already supported the euro’s rally in the first half, as the relative growth gap between the euro area and the US narrowed. The eurozone economy bottomed out higher than feared, and upcoming fiscal stimulus could lift GDP from late 2025 into 2026. Meanwhile, the US economy showed resilience through H1, but that momentum may be fading — setting the stage for renewed divergence in growth expectations and FX performance.
Sterling jumps against commodity peers
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: August 18-22
All times are in BST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
