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GBP - Sterling balances political transition against persistent inflation risks
Sterling enters the week navigating a challenging domestic backdrop, where political transition and weakening economic momentum are offset by relatively supportive interest rate expectations. Andy Burnham is expected to take office on 20 July with an uncontested mandate. While his commitment to maintaining existing fiscal rules has provided a degree of market reassurance, the absence of detailed policy guidance, particularly around public spending, taxation and UK-EU relations, continues to limit investor conviction.
Recent economic data has reinforced concerns around slowing activity. The Institute of Directors' confidence index fell to -61 in June, while the latest PMI readings moved further into contraction territory, with the Composite Index at 49.4 and Services at 48.7, the weakest reading in over three years. Combined with April GDP contracting by 0.1%, the data points to a softening domestic economy.
For the Bank of England, policy remains finely balanced. Inflationary pressures persist despite weaker growth, with May CPI holding at 2.8% and services inflation remaining elevated at 3.7%. Higher energy prices, driven by geopolitical tensions in the Middle East and July's increase in the energy price cap, continue to complicate the inflation outlook. Markets are currently pricing the Bank Rate to remain at 3.75% through the summer, placing increased attention on the Monetary Policy Committee's meeting on 30 July.
Sterling also continues to benefit from a relatively attractive yield advantage against the Euro. GBP/EUR reached €1.1749 last week, its highest level of 2026, although that interest rate differential has narrowed following the ECB's June rate increase.
Major Weekly Data:
Thursday 16th
7:00am - GDP m/m
Speeches:
Tuesday 14th
9:45am - BOE Gov Bailey Speaks
9:00pm - BOE Gov Bailey Speaks
EUR - Energy markets continue to shape the Euro outlook
The Euro's recent recovery has stalled as rising energy prices re-emerge as a key macro driver. Increasing natural gas prices and concerns over Europe's relatively low storage levels, particularly during a period of elevated summer demand, have reinforced downside risks for the single currency.
With a relatively light European economic calendar this week, short-term Euro pricing is likely to be influenced more by developments in energy markets than by central bank communication. While ECB President Christine Lagarde is scheduled to meet Federal Reserve Chair Kevin Warsh in Washington, markets are not anticipating any policy signals from the discussions.
Consensus expectations suggest EUR/USD could remain under pressure in the near term, with the $1.1360 area providing initial technical support before attention shifts towards the $1.1300–$1.1325 region should energy-driven inflation concerns continue to build.
No Major Weekly Data
USD - Inflation data and federal reserve commentary take centre stage
The Dollar continues to find support from resilient economic fundamentals, elevated energy prices and expectations that the Federal Reserve will maintain a cautious policy stance.
While geopolitical developments in the Gulf remain a significant source of uncertainty, their impact on oil prices has reinforced expectations that inflation could remain more persistent than previously anticipated. Markets continue to assess whether renewed energy inflation may delay any easing in US monetary policy.
This week's focus shifts firmly towards the US inflation calendar. June CPI will be closely scrutinised, with headline inflation expected to moderate on a monthly basis. However, core inflation is forecast to remain close to 2.8–2.9% year-on-year, suggesting underlying price pressures remain sufficiently firm to support the Federal Reserve's current policy stance.
Federal Reserve Chair Kevin Warsh also begins two days of Congressional testimony, alongside a busy schedule of Producer Price Index data, import prices, retail sales and the release of the Federal Reserve's Beige Book ahead of the 29 July FOMC meeting.
Current market pricing continues to favour the Dollar while interest rate expectations remain elevated. Higher energy prices, resilient domestic demand and a still-restrictive Federal Reserve are likely to support the Dollar against lower-yielding G10 currencies, with the Dollar Index (DXY) retaining upside potential should incoming inflation data reinforce expectations that policy will remain restrictive for longer.
Major Weekly Data:
Tuesday 14th
1:30pm - Core CPI m/m, Core CPI y/y, CPI m/m & CPI y/y
3:00pm - Fed Chairman Warsh Testifies
Wednesday 15th
1:30pm - Core PPI m/m & PPI m/m
3:00pm - Fed Chairman Warsh Testifies
Thursday 16th
1:30pm - Core Retail Sales m/m, Philly Fed Manufacturing Index, Retail Sales m/m, Unemployment Claims
Friday 17th
3:00pm - Prelim UoM Consumer Sentiment & Prelim UoM Inflation Expectations
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