Key Market Insights:

• UK Interest Rate Expectations Shift: Financial markets are now anticipating two interest rate cuts from the Bank of England this year. This marks a notable change in sentiment regarding the UK's monetary policy.
• US Rate Cut Odds Diminish: Following the latest US Consumer Price Index (CPI) figures, the likelihood of a second interest rate cut in the United States has decreased. This suggests markets are adjusting their expectations for the Federal Reserve's actions.
• US Inflation Data Impacts Treasuries and Dollar: US Treasury yields climbed, and the US Dollar strengthened after the June inflation data aligned with expectations. This indicates that the inflation figures influenced investor behaviour in both the bond and currency markets.
• Tariff Impact on US Prices: The underlying details within the US CPI data suggest that the impact of tariffs is beginning to show up in consumer prices. This is an important factor to watch as it could influence future inflation trends.
• GBP Rebounds on Strong UK CPI: The British Pound (GBP) recouped some of its recent losses today following a stronger-than-expected UK CPI report. This positive inflation data provided a boost to the currency.

Market Recap

Here's a concise summary of recent market movements and what they could mean for you:

US Dollar Strength Persists Despite Mixed Inflation News:

The US Dollar (USD) continued its upward trend yesterday, even though the latest inflation report (Consumer Price Index, or CPI) presented a mixed picture. While the overall CPI was in line with expectations, the "core" component – which excludes volatile food and energy prices – came in lower than anticipated for the fifth month in a row.

Why did the Dollar rise if core inflation was lower?

Initially, the dollar saw some selling pressure. However, the market quickly reacted to revised expectations for the Federal Reserve's (Fed) interest rate policy. Before the CPI release, there was a near 100% probability priced in for a second Fed rate cut this year. After the data, this probability dropped to around 75%. This reduction in expected rate cuts means investors now believe the Fed is less likely to aggressively lower borrowing costs, which generally makes the dollar more attractive.

Impact on GBP/USD:

As the US Dollar strengthened, the British Pound (GBP) weakened against it. At the time of this update, the GBP/USD exchange rate has fallen to a significant support level, a low point seen previously in June. This level is crucial, and its ability to hold will be closely watched by traders. A sustained break below this point could signal further declines for the Pound relative to the Dollar.

In essence, the market is digesting the idea that while some inflationary pressures might be easing in the US, the Federal Reserve might not be as quick to cut rates as previously thought. This has supported the US Dollar and put pressure on currencies like the British Pound.

Today’s Market Update:

UK Inflation Surprise & Its Impact on Sterling:

Recent UK inflation data came in "hotter" than anticipated, with month-on-month CPI at 0.3% (vs. 0.1% expected) and the annual rate at 3.6% (vs. 3.4% expected). Services CPI, a key indicator, stood at 4.7%. This unexpected rise in prices has led markets to pare back their expectations for interest rate cuts from the Bank of England, now only forecasting two cuts for the year. This shift has given the British Pound (GBP) a modest boost against other currencies today. Looking ahead, tomorrow's UK jobs report will be crucial; strong employment figures could further bolster the Pound, potentially easing the recent downward pressure it has experienced.

US Economic Policy in Focus:

• Fed Leadership Speculation: A recent report suggests Kevin Hassett is a leading candidate to replace Jerome Powell as the Federal Reserve Chair. This is noteworthy as the Fed's leadership and its approach to monetary policy can significantly influence global markets.
• Impending US Tariffs: President Trump is reportedly planning to impose tariffs on pharmaceutical imports as early as August 1st. This development highlights ongoing trade tensions and could have broader implications for global supply chains and consumer prices.
• Producer Price Index (PPI) Data Due: Today 1:30 PM BST, the US Producer Price Index (PPI) inflation numbers will be released. This data measures the average change in selling prices received by domestic producers for their output. A "hotter" (higher than expected) PPI reading could further reduce the odds of additional US interest rate cuts and potentially increase demand for the US Dollar, as it signals persistent inflationary pressures that might require tighter monetary policy.

What This Means for You:

The interplay of unexpected inflation in the UK, shifting expectations for central bank rate cuts in both the UK and US, and evolving trade policies, particularly in the US, are creating a dynamic market environment. Keeping an eye on key economic releases like tomorrow's UK jobs report and today's US PPI will be vital for understanding potential shifts in currency valuations and broader market sentiment.

16th July 2025

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