EUR/GBP Climbs Ahead of ECB Rate Decision

EUR/GBP edged higher near 0.8679 as growing market confidence that the ECB will hold interest rates steady at its July meeting on Thursday supported the shared currency. Additionally, trade tensions between major economies escalated after a report indicated that US President Donald Trump has demanded a higher baseline tariff, ranging between 15% and 20%, instead of the 10% that was previously being negotiated. Furthermore, Trump has been hesitant to reduce the 25% automobile levy. This has compelled EU officials to accelerate their plans for retaliation to protect their interests. In response, Germany, previously one of the more cautious voices in the bloc, has now aligned itself with France and others advocating for a stricter stance. As one German official told The Journal: "If they want war, they will get war." The European Central Bank (ECB) reported in its quarterly survey on the Access to Finance of Enterprises (SAFE), released Monday, that most Eurozone companies remain optimistic about growth prospects but are encountering challenges due to trade tensions. The report noted that firms' one-year-ahead inflation expectations decreased to 2.5% from 2.9%, while expectations for three and five years ahead stayed steady at 3.0%. The impact of trade tensions mainly affects manufacturers and companies exporting to the US. Additionally, a net 23% of firms are optimistic about developments in the upcoming quarter, even though they report a decline in profits.

On the sterling front, investors are awaiting the United Kingdom (UK) S&P Global Purchasing Managers' Index (PMI) data for July. Market speculation suggests that the Bank of England (BoE) may cut interest rates multiple times for the rest of the year. This expectation is driven by the release of the June UK Consumer Price Index (CPI) data, which was higher than expected, and weaker-than-anticipated labour market figures for the three months ending in May. The UK unemployment rate rose to 4.7% in the three months to May, up from 4.5%, yet it still fell short of the predicted 4.6%. Last week, the UK CPI report indicated a faster-than-expected acceleration in inflation, with headline and core CPI increasing by 3.6% and 3.7% year-on-year, respectively. Labour market data also showed that the decrease in employed workers was less severe than earlier reports suggested; the number of laid-off workers was revised down to 25,000 from an initial estimate of 109,000. Meanwhile, market expectations for the Bank of England's (BoE) interest rate decision in the upcoming monetary policy announcement next month will be a key driver for the Pound Sterling.

Broader market sentiment around the BoE Governor Andrew Bailey's testimony on July's Financial Stability Report before the Treasury Select Committee, along with the European Central Bank (ECB) interest rate decision, will influence the EUR/GBP exchange rate.

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USD/CHF Tumbles on Upbeat US Economic Data

NZD/USD struggled near 0.5948 after the release of mixed domestic inflation data from New Zealand that could encourage RBNZ rate cuts. Statistics New Zealand published the Consumer Price Index (CPI) data for the second quarter on Sunday, which showed a mixed picture. While both the QoQ and YoY figures were below estimates, inflation in the second quarter was at 0.5% compared to a 0.6% estimate, decreasing from 0.9% previously. Meanwhile, the annual Q2 figure was 2.7%, below economist forecasts of 2.8% but above the previous 2.5%. Signs of easing inflation in New Zealand suggest there may be at least one more rate cut by the Reserve Bank of New Zealand (RBNZ) this year. RBNZ officials have emphasised that they are closely watching the slowdown and are willing to cut rates if disinflation continues and economic growth remains weak. During the 28 May Monetary Policy Press Conference, Acting RBNZ Governor Christian Hawkesby said, "We're seeing softening momentum in business investment, household spending, and the labour market. We're in a data-dependent phase, and further easing is not off the table."

Traders are awaiting further updates on trade negotiations between the US and China. China may reach a long-term tariff agreement with the US before the 12 August deadline. US Commerce Secretary Howard Lutnick confirmed in a televised interview, "That's a hard deadline, so on 1 August, the new tariff rates will be implemented. Countries are still free to talk to us after 1 August, but they will start paying tariffs from that date." On Monday, the People's Bank of China (PBoC) decided to keep its one- and five-year Loan Prime Rates (LPRs) unchanged at 3.00% and 3.50%, respectively.

Renewed worries about global trade uncertainties continue to bolster the greenback. In April, US President Donald Trump postponed the so-called "reciprocal tariffs," aiming to finalise around 90 trade agreements in 90 days. The White House announced that country-specific tariffs will be implemented on 1 August unless specific nations reach trade agreements with the US beforehand. This tariff uncertainty is expected to increase safe-haven demand, which benefits the US dollar. A White House official indicated that President Trump might soon dismiss Fed Chairman Jerome Powell. However, Trump dismissed these claims in a Truth Social post on Sunday, calling them "typically untruthful." Concerns regarding the US Federal Reserve's (Fed) independence could also weigh on the USD. US Treasury Secretary Scott Bessent warned that the Fed's independence is threatened by "mandate creep" into non-policy areas. Bessent emphasised the need for reforms of the outdated financial regulatory system and suggested regulators consider abandoning the "flawed" dual capital requirements for banks.

Broader market sentiment around the trade tariff uncertainties and concerns over the US Federal Reserve (Fed) independence could drive the NZD/USD exchange rate in upcoming sessions.

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AUD/JPY Struggled Following the RBA Minutes

AUD/JPY subdued near 96.12, following the release of the Reserve Bank of Australia's (RBA) Meeting Minutes. The RBA Minutes from its July monetary policy meeting indicated that the board agreed that additional rate cuts are justified over time, focusing on the timing and degree of easing. Most members preferred to wait for confirmation of a slowdown in inflation before proceeding. They believed that implementing three cuts in four meetings would not be considered "cautious and gradual." The survey mentioned that monetary policy was somewhat restrictive, although financial conditions had relaxed. Regarding tariffs, the minutes stated that US tariffs would hinder global growth, affecting Australia, where GDP growth is already weak. There is uncertainty over whether employment in market sectors will improve as non-market sectors slow down. The outlook for the global economy remains highly uncertain, with US trade policies unpredictable.

On Friday, China's Commerce Minister Wang Wentao stated that although economic and trade relations with the United States have faced challenges, they remain important. He emphasised that mutual benefit is central to US-China trade relations. Wentao also mentioned that the Geneva agreement and London framework have effectively stabilised commercial ties and reduced tensions. China's economy grew by 5.2% annually in the second quarter, slightly below the 5.4% growth in the first quarter but above the forecast of 5.1%. Additionally, the Chinese Gross Domestic Product (GDP) increased by 1.1% in Q2, exceeding the market expectation of 0.9%. Retail sales in June rose by 4.8% year-on-year, compared to an expected 5.6% and the previous 6.4%, while industrial production reached 6.8%, surpassing the anticipated 5.6%.

On the yen's front, the market remains cautious as investors are growing more worried that the fragmented political landscape could hinder the government's ability to carry out economic reforms or work efficiently with the Bank of Japan (BoJ). Japan's top trade negotiator, Ryosei Akazawa, stated on Tuesday that he met US Commerce Secretary Howard Lutnick for two hours in Washington on Monday. He also added that he met with US Commerce Secretary Lutnick for over two hours in Washington yesterday. They held frank talks to seek an agreement benefiting both Japan and the US.

In the upcoming session, Jibun Bank Flash Manufacturing Purchasing Managers' Index (PMI), political uncertainty in Japan, and the RBA Minutes will influence the AUD/JPY exchange rate.

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USD/CAD Subdued by Tariff Fears Looming

USD/CAD traded near 1.3688, as the market seems cautious ahead of Trump's tariffs deadline. The US Commerce Secretary has shown optimism about the chances of striking significant deals before the 1 August deadline, but the US President continues to modify tariffs randomly, which increases investors' anxiety. Regarding the data, product prices made in Canada, tracked by the Industrial Product Price Index (IPPI), went up by 0.4% in June compared to the previous month and rose 1.7% over the past year. Simultaneously, raw material prices bought by Canadian manufacturers, as indicated by the Raw Materials Price Index (RMPI), increased by 2.7% month-over-month and grew by 1.1% year-over-year. The Business Outlook Survey indicates that tariff-related uncertainty continued to dampen business and consumer confidence in the second quarter. However, the previously feared worst-case trade scenarios now seem less probable. Tariffs and trade tensions remain a concern for many companies. In some cases, the anticipated negative effects on costs and sales from last quarter have already occurred, and companies expect these issues to continue," the report stated. It also noted that while concerns about tariffs directly impacting Canadian businesses have slightly decreased, new worries have arisen regarding the broader consequences of tariffs on the global economy and demand within Canada. The survey concludes that this ongoing uncertainty continues to discourage firms from making new investments, as they remain cautious in their financial approach.

On the greenback front, rising uncertainty over impending tariffs and increasing worries about the Federal Reserve's (Fed) independence continue to dampen the market sentiment around the US dollar. A White House official indicated that President Donald Trump might soon dismiss Fed Chair Powell, but Trump dismissed the claim in a Truth Social post on Sunday, calling it "typically untruthful." Investors are watching for any signs that Trump might find a reason or method to remove Powell before his term ends next year. Concerns about the Fed's independence could weaken the US dollar in the short term. US Treasury Secretary Scott Bessent warned that the Fed's independence is threatened by its expanding role into non-policy areas, urging a thorough review of these activities. He also called for a reassessment of the Federal Reserve as an institution. Trump's renewed criticism of Powell's stance on interest rates has heightened speculation about his potential dismissal.

In the absence of any key data from Canada, the Richmond Manufacturing Index, Fed Chair Powell's speech, and oil price dynamics will influence the USD/CAD exchange rate.

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