GBP
The UK remains caught between persistent inflation and a cooling labour market. May’s CPI rose to 3.4 per cent, with the Bank of England expecting a peak of 3.5 per cent in Q3. Energy and regulated prices continue to drive the increase, though the BoE maintains its forecast for inflation to return to 2 per cent in 2026.
Governor Andrew Bailey’s recent comments have reinforced a cautious stance. While markets had anticipated up to four rate cuts this year, the central bank’s stance seems to show policymakers are in no rush to loosen monetary policy.
The labour market could be supporting this narrative, with payrolled employees falling 0.4 per cent over the three months to May and wage growth continuing to decelerate. Private sector earnings growth has slowed to 5.1 per cent, and pay settlements are aligning with the BoE’s inflation target range of 3.5–4.0 per cent.
This backdrop supports a gradual policy shift but not an imminent one. For sterling, this could mean some near-term resilience – particularly if inflation comes in above expectation on Wednesday. However, the broader outlook remains cautious.
EUR
While eurozone data takes a back seat this week, the bloc remains exposed to external risks – chief among them US trade policy.
President Trump’s tariffs, set to take effect on Friday 1 August, include a 30 per cent levy on EU goods. If fully implemented, these measures could weigh on eurozone exports, dampen growth, and complicate the European Central Bank’s policy outlook.
For now, the euro has been relatively stable, supported by a broadly neutral ECB and a weaker US dollar. But the risk of retaliatory measures and trade-driven inflation could reintroduce volatility in EUR/USD as we move into Q3.
USD
Tuesday’s US CPI print is expected to confirm a continued disinflationary trend. May’s data showed a modest 0.1 per cent monthly rise, with annual inflation at 2.4 per cent. Core CPI also rose just 0.1 per cent, bringing the year-on-year figure to 2.8 per cent. Shelter costs (which include rent and homeowner’s equivalent to rent) remain sticky, but the broader picture seems to support the Federal Reserve’s patient stance.
However, the looming tariff deadline complicates the outlook. If implemented, the average US tariff rate could rise to 25 per cent, up from 14 per cent. This could lead to elevated inflation and depressed growth, a combination that is uncomfortable for policymakers. While the dollar has weakened significantly over the past six months, much of the tariff risk appears priced in for now.
For USD crosses, the near-term direction could hinge on Tuesday’s CPI and how markets interpret the Fed’s next move. If the data comes in below expectation, it could reinforce expectations for rate cuts later in the year unless tariffs force a rethink.