US
Brent crude oil prices dropped more than 5% from yesterday’s $102 a barrel high. There was no clear fundamental trigger, though reports that ships are transiting the Red Sea with tracking systems switched off may have contributed. The pullback in oil prices is offering stocks and bonds some relief while curbing USD strength.
The US July PMI will test whether the US growth advantage remains intact (2:45pm London, 9:45am New York). A stronger relative print would reinforce the US economic outperformance theme and support further USD gains. A softer reading would narrow that edge and leave USD vulnerable to a correction.
From today, the US will collect duties of between 10% and 12.5% on imports from 60 trading partners. The levies replace the temporary 10% global tariff and exempt some energy, food and other critical imports. The measures preserve the current broad tariff floor, leaving financial market implications limited. The average effective tariff rate is estimated at 12.8% by year-end, the highest since the early 1940s, but well below the feared 23% peak seen in April 2025.
EUROZONE
EUR/USD recovered some of yesterday’s slump but is holding under 1.1400. The Eurozone July PMI was a lot stronger than anticipated. The composite PMI increased to a five-month high at 51.9 (consensus: 50.2, prior: 50.0) reflecting both a recovery in services business activity and a faster expansion in manufacturing production. Nevertheless, renewed oil price gains keep the risks tilted toward weaker Eurozone growth and higher inflation. That limits EUR/USD relief rallies.
ECB delivered a hawkish hold yesterday. As was widely expected, the ECB left the policy rate unchanged at 2.25%. ECB President Christine Lagarde said the decision was unanimous, although some governors asked themselves whether a rate hike should be considered.
The ECB is on track to lift rates 25bps at the next September 10 meeting (90% priced in). Over the next twelve months, the swaps curve implies nearly 75bps of tightening to 3.00%. That would leave the policy rate at the top of the ECB’s estimated neutral range (1.75%-3.00%).
Tighter monetary policy when the Eurozone economy is still operating below potential is more likely to limit EUR downside than push the currency higher because it raises the likelihood of a downward adjustment to ECB rate expectations.
UK
GBP/USD is consolidating near yesterday’s lows around 1.3300. Today’s UK data point to a more favorable UK growth-inflation mix that is GBP supportive. Stronger PMIs and retail sales reduce near-term growth concerns, while lower inflation expectations (both 1 and 3 years ahead) give the BOE room to stay patient.
UK retail sales beat forecast again. Total retail sales volumes increased 1.0% m/m (consensus-0.3%) vs. 1.2% in May. Excluding automotive fuel, retail sales were up 1.1% (consensus: -0.5%) vs. 1.2% in May. The headline is clearly positive, but the details are not consistent with a sustained consumer boom. Promotions, hot weather, and World Cup spending provided much of the boost.
The UK July PMI surprised to the upside. The composite PMI increased to a three-month high at 52.1 (consensus: 49.8, prior: 48.8) reflecting both a recovery in services business activity and a faster expansion in manufacturing production.
The BOE’s DMP business survey of inflation expectations eased in July. Both 1-year and 3-year inflation expectations fell -0.3ppt to 3.0% (matching the February low) and 2.6% (the lowest since October 2024), respectively.
JAPAN
USD/JPY is consolidating just under a multi-decade high. Japan private sector growth strengthens to five-month high in July, supporting the BOJ’s hawkish bias. The composite PMI improved to 53.1 vs. 52.8 in June led by the steepest increase in manufacturing production since February 2014 with softer growth in services.
Japan June CPI largely matched consensus. Headline CPI rose to 1.7% y/y vs. 1.5% in May held in check by government subsidies on energy. Core CPI ex. fresh food increased to 1.6% y/y vs. 1.4% in May, and core CPI ex. fresh food & energy unexpectedly dipped to 1.7% y/y (consensus: 1.8%) vs. 1.8% in May. Both measures of core CPI are tracking well below the BOJ’s 2026 forecast of 2.8% and 2.6%, respectively, consistent with a gradual BOJ tightening cycle.
The BOJ is widely expected to keep rates on hold at 1.00% next week after delivering a well-telegraphed 25bps hike in June. The swaps curve price in a 25bps rate hike by year-end and a total of 60bps of tightening to between 1.50% and 1.75% over the next twelve months.
That would still leave the policy rate near the middle of the BOJ’s estimated neutral range (1.10%-2.50%) even as the economy runs above potential, leaving scope for an upward adjustment to BOJ rate expectations in favor of JPY.
