ECB to sit on its hands this Thursday
The euro retreated from Friday’s highs of around $1.1670 against the dollar after the FT reported that Trump is seeking to impose a tariff of 15-20% on the EU, greater than the 10% currently in place (albeit less than the 30% contained in the infamous letter), with the single currency ending lower for a second week running. Sterling also came off its best levels against the dollar, finishing lower for a third week in a row. They kick off this week trading at around $1.1630 and $1.3440 respectively, while EURGBP is hovering just above £0.8650 having traded in a relatively narrow range last week. The ECB meets on Thursday, with the euro’s exchange rate less problematic for the central bank now that it has fallen back from its 2025 highs in early July. Having cut the deposit rate by 200bps (to 2%) to date, and with monetary policy in a “good place” (in the vicinity of neutral) according to Christine Lagarde, the ECB is widely expected to stay on hold this week. The market expects one further 25bps reduction by the end of the year, but much may depend on what happens post August 1st, the ‘deadline’ for the EU and US to agree some sort of trade deal.
US government bond yields ended slightly lower on Friday after Fed member Waller said the central should cut interest rates at its meeting later this month, though they were largely unchanged on the week overall. German yields were a touch lower on the week, while UK bonds underperformed with yields edging up on the back of the latest UK inflation data. In equity markets, the S&P nudged down from Thursday’s all-time high to finish with gains for the week of around 0.5%, while European stocks were marginally lower on the week.
According to Friday’s FT report, Trump has escalated his demands on the EU following weeks of negotiations on a possible framework trade deal, seeking a minimum 15-20% tariff on US goods imports from the EU with increasingly limited exemptions and carve-outs. At the same time, Bloomberg reports that the EU continues to “formulate a plan for measures to respond to a possible no-deal scenario.”
Looking to the week ahead, Thursday’s ECB meeting will be the main focus for markets, while on the economic data front the key releases will be the flash PMIs for July in the main economies, also on Thursday. Other data of note include retail sales and consumer confidence in the UK on Friday.