Market Commentary

Iran’s attack on vessels transiting the Strait of Hormuz prompted a rise in oil prices, higher bond yields, lower stocks, and some firming of the dollar. The US last night announced that it had carried out strikes on targets in Iran in response (as well as revoking a temporary waiver allowing the sale of Iranian oil), while Iran said it had conducted strikes on US military sites in the Middle East, all of which of course raises concerns about the ongoing “peace talks” between the two sides. The fall-out in FX has been limited enough though. The euro and sterling have both lost some ground to the dollar to trade at around $1.1425 and $1.3365 respectively this morning, albeit off overnight lows of about $1.14 and $1.3340. EURGBP is little changed through all this, hovering just below the £0.8550 level.

Yesterdays Events

Government bond yields spiked higher on the back of rising oil prices – Brent crude is up at a circa 2-week high of over $76.5 a barrel – with US 10-year yields climbing by around 8bps (to 4.55%, a 1-month high) and equivalent German and UK yields increasing by around 5-6bps (both are continuing to edge higher at the start of play this morning). Equity markets were under pressure over the course of the day with the Stoxx Europe 600 and the S&P 500 both shedding just over half a percent.

The Bank of England notes in its latest Financial Stability Report that “AI has the potential to raise productivity across a range of sectors and, in turn, support long-term economic growth,” while also highlighting that there is “uncertainty over the scale and timing of future productivity gains and the ability of companies to monetise these”. It also notes that “while AI-related equity valuations are underpinned by forecasts of strong long-term earnings growth, those forecasts are highly uncertain and depend on the successful buildout of infrastructure, continued access to financing, and the pace at which AI is adopted.”

The Day Ahead

Looking to the day ahead, the Fed publishes the minutes of its June monetary policy meeting, which was the first under new chair Kevin Warsh. During his post-meeting press conference, Warsh said on a number of occasions that Fed members “are unanimously and unambiguously committed” to returning inflation to its 2% target, so the minutes will be scrutinised for any indications about what that might mean for interest rates in the near-term. The IMF publishes a World Economic Outlook update, which will take into account the fall in oil prices over the past month or so, while there are a few ECB members due to speak over the course of the day.

Market Commentary

The euro and sterling attempted to push higher against the dollar yesterday, getting up to highs of around $1.1450 and just over $1.34 respectively, but they haven’t been able to sustain their gains, not helped by reports of Iranian attacks on tankers in the Strait of Hormuz. They are trading at around $1.1430 and $1.3380 this morning, respectively unchanged and slightly firmer relative to yesterday morning’s levels. Hence the pound continues to nudge higher against the single currency, now at around £0.8530, levels last seen in late June 2025.

Yesterdays Events

Bond markets were fairly quiet. US Treasuries outperformed as yields ended slightly lower on the day, while German and UK yields were both marginally higher (with modest curve steepening the order of the day across markets). It was a mixed day in equity markets. European stocks fell back a little following two days of solid gains, while US indices closed in the black, led by the Nasdaq which added more than 1%.

The US economy remains relatively resilient judging by the latest ISM services survey. The headline index fell back in June but remained in solid expansionary territory at a reading of 54.0, while the employment index moved above the key 50 level for the first time since February. Input costs eased last month albeit they remained elevated.

Fed Governor Waller says the US labour market is showing signs of stabilizing, allowing policymakers to focus on inflation, noting that the “risks have completely flipped around…that changes how you might want to think about (monetary) policy.” While the market has pared back expectations for rate hikes lately, which has taken the dollar off its recent highs, it is still pricing in about 38bps of policy tightening by next spring.

The Day Ahead

For the day ahead, US economic data includes the ADP weekly employment report, trade balance (May), and the New York Fed’s June survey of inflation expectations, while the Bank of England publishes its latest Financial Stability Report.

Market Commentary

The euro and sterling both regained some ground against the dollar last week, having fallen in each of the two previous weeks, gaining around half a cent and one and a half cents overall respectively. They have though retreated from their very best levels of the week reached immediately following last Thursday’s softer than forecast US jobs report (of around $1.1470 and $1.3385) to trade at about $1.1425 and $1.3340 this morning. EURGBP is trading at around £0.8565, having fallen to a more than 12-month low of just under £0.8550 last week following Wednesday’s weaker than expected Euro area inflation data for June. It’s a quiet relatively week ahead in terms of economic data with today’s ISM services index in the US one of the main releases of note, while the minutes of last month’s Fed monetary policy meeting, the first under new Chair Kevin Warsh, are published on Wednesday.

Yesterdays Events

Government bond yields were generally higher on the week in an “risk on” environment that saw equity markets advance. The US led the way with 10-year yields increasing by around 11bps, while equivalent German and UK yields rose by around 8bps and 5bps respectively. European stocks outperformed on the week with the Stoxx Europe 600 gaining almost 3%, while the S&P 500 in the US gained almost 2%.

ECB Governing Council member Moulin says the “very rapid” fall in oil prices “puts us in a better position on (interest) rates,” while refraining from indicating what the central bank might do at forthcoming meetings. The market has pared back expectations for further rates hikes quite considerably over the past few weeks, with another 25bps hike in the deposit rate not fully priced in until around June next year.

The Day Ahead

In addition to today’s ISM services index in the US, other economic data due include Euro area retail sales and producer prices, both today, and the RICS housing survey in the UK on  Thursday. There are a number of ECB members due to speak over the course of the week.

Market Commentary

The US economy added fewer jobs than expected in June according to yesterday’s employment report, prompting an easing of Fed rate hike expectations, a decline in short-dated US bond yields, and a fall in the dollar. The euro and sterling have both gained around a half a cent relative to yesterday morning’s levels, trading at around $1.1450 and $1.3360 respectively this morning. This leaves EURGBP little changed at around £0.8565, close to its lows for the week so far of just under £0.8550. It’s a public holiday in the US today (Independence Day), so markets may be relatively quiet heading into the weekend.

Yesterdays Events

The weaker than expected jobs report contributed to an easing in expectations for Fed rate hikes with about 30bps now priced in by year-end, down from around 36bps before the data. This in turn contributed to a modest decline in US 2-year bond yields, which fell by around 5bps, while 10-year yields were broadly flat. Elsewhere in bond markets, German and UK yields were flat to marginally higher on the day. Meanwhile, in equity markets, European stocks had another positive session, adding more than 1%, while it was a mixed day for US indices with the Nasdaq off almost 1%, the Dow Jones up more than 1%, and the S&P 500 largely unchanged.

The US economy added 57k jobs in June, a good bit shy of the consensus forecast for a gain of circa 115k, while there were also downward revisions to the previous couple of months. Still, jobs growth averaged 111k a month in the second quarter (April-June), accelerating from 73k a month in Q1 and a marked contrast from an average decline in employment of almost 40k a month in the final quarter of 2025). The unemployment rate nudged down to 4.2% last month, from 4.3% in May, though this was mainly due to a (continuing) fall in the labour force participation rate, while the y-o-y growth in hourly earnings ticked up to 3.5% (from 3.4%).

ECB President Lagarde says “we are convinced we made the right decision” in raising interest rates this month, noting that “as early as April, a large majority of the Governing Council was ready to make a decision but we didn’t have all the necessary information.” She also notes that “we are facing an external supply shock that is spreading through the rest of the economy, and we are now seeing its indirect effects”, adding that “we are also paying close attention to the risk of second-round effects, even though they have not materialized so far.” The market has pared back expectations for a further increase in interest rates quite a bit lately with only about 18bps now priced for the end of this year.

The Day Ahead

It is a quiet end to the week in terms of economic data with a final reading for the June services PMI in the Euro area the only release of note. There a few central bank members due on the wires over the course of the day.

Market Commentary

Softer than expected Euro area inflation data weighed on the euro yesterday, with the single currency falling to an intra-day low of around $1.1360 against the dollar and breaking below the £0.86 level versus sterling for the first time in just over a year. Comments by Fed Chair Warsh – that risks to US inflation had receded somewhat in recent weeks – has provided some (modest) relief for EURUSD, which is trading at about $1.14 this morning, and has helped propel GBPUSD higher to over $1.33, while EURGBP Is trading at around £0.8560. The key economic data release today is the June employment (payrolls) report in the US. Stronger than expected data might reinforce market expectations for Fed rate hikes (there’s almost 50bps priced in by spring next year) and so support the dollar, while weaker than expected data could weigh on the currency.

Yesterdays Events

In government bond markets, German 2-year yields ended the day a couple of basis points lower in response to the soft Euro area inflation data, while 10- and 30-year year yields closed marginally higher. It was a similar pattern for UK bonds with short-dated yields slightly lower but yields further out the curve a touch higher, while US yields were unchanged to slightly higher across the curve. Meanwhile, the rally in equity markets ran out of steam, with both US and European stocks ending lower having gained ground over the first couple of days of this week.

Headline inflation in the Euro area fell to 2.8% in June – below the consensus forecast of 3% – from 3.2% in May, reflecting an easing in energy price inflation, a further decline in food price inflation, and a drop in core inflation to 2.4% from 2.6% in May. The latter was due to a decline in core services inflation (to 3.2% from 3.5%), as core goods inflation was unchanged (at 0.9%). ECB rate hike expectations softened a little on the back of the data –  about 21bps is now priced in by year-end, down from around 25bps before the data.

Bank of England Governor Bailey says inflation in the UK, currently running at just under 3%, is likely to pick up a bit over the second half of this year. He acknowledged that the economy and labour market are both “softening” but said interest rate cuts, which had been expected before the war on Iran, remain “off the table”.

The Day Ahead

As well as the jobs report, other US economic data scheduled for today include the regular weekly jobless claims and factory goods orders for May. Elsewhere, unemployment data (May) are due in the Euro area.

Market Commentary

June proved to be a positive month for the dollar which chalked up solid gains, including a 2.5 cents (or 2%) advance against the euro, propelled higher by a “hawkish” turn by the Fed during the course of the month. Some solid economic data and higher US bond yields are helping to underpin the US currency at the start of July. EURUSD and GBPUSD are trading at around $1.14 and $1.3230 this morning, retreating from yesterday’s best levels of circa $1.1440 and $1.3280 respectively. EURGBP continues to hover just north of £0.86. Today sees the release of a ‘flash’ reading for Euro area inflation in June. Headline inflation is expected to have dipped last month (to 3%) having risen in each of the previous three months in response to the energy price shock. A softer than expected inflation outturn could put some further downside pressure on the single currency. Fed Chair Warsh is due to appear at the ECB’s central banking forum in Sintra, so his remarks will command some attention.

Yesterdays Events

A firming of Fed rate hike expectations, partly in response to better than expected US labour market-related data, contributed to a notable rise in US bond yields, which increased by around 8-9bps across the curve. German yields, in contrast, were flat to slightly lower, in response to softer than expected German inflation data, while UK yields were 3-5bps higher on the day. In equity markets, the Nasdaq in the US continued its recovery from last week’s decline, gaining a further 1.5% or so, while European indices closed around 1% to 1.5% higher.

Headline HICP inflation in Germany fell for a second month running in June according to the flash estimate, coming in at 2.4% after 2.7% in May, largely due to a further easing in energy price inflation. The outturn for Germany, together with available readings for France, Italy, Spain and Ireland, point to a fall in Euro area headline inflation this month. It is likely that core inflation (excluding energy and food prices) also nudged down last month (from May’s 2.6%).

Fed member Hammack says “we’ve got inflation that’s too high, and it’s been too high for the past five years,” adding that “if that continues, we may need higher interest rates to bring inflation back down to (the 2%) target.”

The Day Ahead

Looking to the day ahead, as well as Euro area inflation, other economic data due include the ISM manufacturing index and ADP employment report (both for June) in the US and final PMI manufacturing readings for June in the main economies. As mentioned, the ECB’s central banking forum continues in Sintra.

Market Commentary

It was a fairly quiet start to the week in markets. Bonds mainly treaded water following a sharp fall in yields last week, while US stocks recovered some ground having been on the back foot over the past few sessions. In FX, the euro is hovering around the $1.14 level against the dollar, largely unchanged from yesterday morning’s levels. Sterling is marginally firmer against the US currency at about $1.3240, and is also inching higher against the euro albeit still holding just above £0.86 . More notably, the yen has fallen to new record lows of over Y162 against the dollar, which obviously carries with it the risk of official intervention to support the currency.

Yesterdays Events

US and German government bond yields ended flat to slightly higher yesterday, while UK bonds outperformed a touch, closing out the day unchanged to slightly lower. In equity markets, the Nasdaq led a rebound in US stocks, gaining just over 2% (having shed almost 5% last week), while European indices were unchanged to marginally lower on the day.

UK GDP data released a short while ago showed the economy expanded by a healthy 0.6% q-o-q in the first quarter of this year – confirming the initial estimate published a while back – with consumer spending (+0.6%) and business investment (+0.9%) both advancing in the quarter, but high-frequency indicators point to a moderation in the pace of economic activity since (largely on account of the fall-out from the conflict in the Middle East). Meanwhile, Prime Minister-elect Burnham promised a decade of renewal for the UK in a keynote speech yesterday, saying his plans would be based on “the stability that comes from sound public finances” and “the discipline of our current fiscal rules”.

ECB Chief Economist Philip Lane says he is “focused on the indirect effects” of the energy price shock and “how the four months of energy-cost increases percolate into food inflation and services inflation in particular,” while adding that the ECB is committed to “not boxing ourselves in” on the path for interest rates.

The Day Ahead

Looking to the day ahead, economic data include consumer confidence, house prices and job openings in the US, while a flash reading of inflation in June is due in Germany ahead of inflation data for the Euro area tomorrow. The ECB’s Central Banking Forum continues in Sintra.

Market Commentary

A renewed outbreak of hostilities between the US and Iran over the weekend threatened to upset markets at the start of this week but (conveniently enough) the two sides agreed to cease attacks just before Asian markets opened overnight. The dollar chalked up further gains last week albeit it did come off the boil a little on Thursday-Friday. The euro shed around  a cent against the US currency, closing out the week trading just shy of $1.14 (but off intra-week lows of around $1.1325), while sterling fared somewhat better, weakening by less than half a cent to finish at around $1.32 (and off lows of just under $1.3150). EURGBP fell to a fresh 2026 low of just over £0.86 on Wednesday before ending the week down around half a penny at £0.8625. Looking to the week ahead, the key economic data release will be the June employment (payrolls) report in the US on Thursday, though there will be plenty of focus too on Euro area flash inflation data, also for June, on Wednesday. They are expected to show headline inflation eased a little this month, which might also lead to some further easing of ECB rate hike expectations.

Yesterdays Events

There was a notable easing of central bank rate hike expectations generally last week, in tandem with a sizeable decline on oil prices, with about 25bps now priced in for the ECB and Bank of England by year-end, both down more than 10bps on the week, and just over 30bps for the Fed, down almost 10bps. The easing of rate expectations contributed to a rally in bonds with 10-year yields in the main markets falling by 10-15bps on the week.

Euro area consumers near-term inflation expectations fell in May according to the ECB’s latest survey, with 1-year ahead expectations declining to 3.5% from a circa 2.5 year high of 4% in April. 3- and 5-year ahead expectations were unchanged at 2.9% and 2.4% respectively albeit both were still up on pre-war levels. Given the fall in oil prices through June, inflation expectations should have eased this month.

The Day Ahead

Looking to the day ahead, economic data due include money supply/credit growth (May) and the Economic Sentiment Indicator (June) in the Euro area and mortgage lending/approvals (May) in the UK. The ECB’s Forum on Central Banking kicks off in Sintra (Portugal) today too and runs through until Wednesday.