Sterling Holds Ground as Fed Doubts Drag the Dollar

Sterling firms at multi-week highs as BoE policy contrasts with retreating ECB. The euro slips despite stronger German data. The dollar softens on fading Fed hike bets ahead of Wednesday's FOMC minutes. The yen hovers near 40-year lows while the RBNZ decision keeps the kiwi pinned.

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GBP: Sterling Stays Bid as ECB Loses Its Edge

GBPUSD 1.3380 | EURGBP 0.8540

Sterling started Tuesday on firm footing. GBP/USD traded around 1.3380 while EUR/GBP hovered near 0.8540 after falling to its lowest level since July last year. The move came despite encouraging economic data from Germany, reflecting investors' preference for the pound over the euro and the structural story running underneath: policy divergence. The Bank of England holds its policy stance while the ECB loses its hawkish edge.

German Industrial Production rose 0.9% in May, comfortably beating expectations for a 0.2% increase and building on April's gain. Under normal conditions, stronger factory output would have offered the euro some support. This time, it barely slowed the decline. The euro absorbed the data and held losses.

The UK's latest housing figures added to sterling's resilience. The Lloyds House Price Index rose 0.2% in June after a 0.1% fall in May. Annual house price growth edged up to 0.6% from 0.5%. The data points to a housing sector that continues to absorb higher borrowing costs better than many expected. Not a market mover in isolation, but it rounds out a picture of a UK economy holding its own.

ECB President Christine Lagarde declined to commit to any particular rate path at last week's central bankers' summit in Sintra. She pointed to balanced risks for growth and inflation and dismissed second-round inflationary effects. The ECB is likely to hold in July after June's rate hike. With the BoE not expected to shift policy in the near term either, the rate differential that had been propping up the euro against sterling has narrowed sharply. Recent price action highlights how expectations around central bank policy can outweigh individual economic releases.

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3400, 1.3470 and Support sits at 1.3280, 1.3200

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8600, 0.8650 and Support sits at 0.8500, 0.8460

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EUR: Euro Holds Above 1.1400 but ECB Resolve Is Fading

EURUSD 1.1432

EUR/USD trades in a narrow range above 1.1400, not far from a two-week high touched last Thursday. The dollar is under pressure, but the euro has no fresh catalyst to push decisively higher.

The ECB's internal debate is the critical dynamic. Governing Council member Wunsch said on Tuesday that he is not ruling out another rate hike and warned that the bank should not wait too long if it decides to move again. However, he also acknowledged that second-round inflationary effects have been limited. The guidance is genuinely ambiguous, and ambiguous guidance is not the same as hawkish guidance. The message leaves the ECB with flexibility rather than commitment. That softer policy outlook has weakened one of the euro's strongest supports in recent months, narrowing the policy advantage that previously supported the single currency.

Soft German consumer price data last week had already suggested that inflation pressures from Middle East-related supply shocks may have peaked, and the ECB is not on a defined tightening path. Oil prices reflect a similar picture: Brent crude continues to trade below $69 per barrel as improving shipping activity through the Strait of Hormuz eases supply concerns. Lower energy prices could help reduce inflation pressures across the euro area, though policymakers will monitor incoming data before drawing firmer conclusions.

Fed Governor Waller weighed in separately, arguing that picking a specific inflation target implies that missing it counts as failure. The comment reframes the Fed's credibility question, not just the near-term rate path. The next catalyst for the euro may come less from Europe and more from the United States, as attention turns to the FOMC minutes on Wednesday.

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1470, 1.3470 and Support sits at 1.1400, 1.1350

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USD: The Dollar Waits for Fresh Direction

DXY 100.90

The dollar index trades at 100.90, below 101. Last week's US jobs report came in sharply below expectations, with payroll figures for the two previous months also revised downward. The cumulative picture is of a labour market cooling faster than the Fed anticipated.

Investors now price in approximately 29 basis points of Fed rate hikes by December, down from 38 basis points a week ago, with the probability of a September hike at around 50%, versus roughly two-thirds before the employment data.

Fed Chair Kevin Warsh has indicated he does not favour explicit forward guidance, which means Wednesday's FOMC minutes may offer less directional clarity than prior releases.

Investors will look for how policymakers frame inflation, employment, and the timing of any future rate changes and whether officials share the softer expectations now priced into the market.

For the dollar, the next move is likely to depend less on historical data and more on how policymakers frame the outlook over the coming months.

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Other Currencies: Yen Near 40-Year Lows, Kiwi Eyes Rate Decision

AUDUSD 0.6941 | NZDUSD 0.5690 | USDJPY 161.87 | GBPJPY 217.20

USD/JPY trades around 161.75, pulling back the pair slightly from last week's peak of 162.84 and still holding yen near its weakest level since the mid-1980s. GBP/JPY touched 217.20 earlier in the session, yen’s lowest since 2007. EUR/JPY last traded around 184.99.

Japanese Finance Minister Satsuki Katayama reiterated that authorities stand ready to act in the FX market if necessary, and that Japan and the United States are in close communication on currency matters. Speculation ran through end of last week that Tokyo might intervene during the US holiday period when liquidity was thinner. No intervention followed. Nominal wages in Japan rose 3.2% in May while household spending contracted 0.4%. The Bank of Japan remains behind the curve on policy normalisation, and fiscal expansion concerns continue to weigh on the yen.

The Australian dollar trades around $0.6941, up modestly for a third consecutive session, with support at the three-month low of $0.6866 and resistance at $0.6980 to $0.7000. The New Zealand dollar trades around $0.5690 ahead of the Reserve Bank of New Zealand's rate decision on Wednesday, with pricing implying a 78% probability of a 25 basis point hike from the current 2.25% official cash rate. The kiwi has softened against the Aussie in the run-up.

Onshore yuan trades at 6.7925 per dollar, broadly unchanged. The People's Bank of China fixed the midpoint rate at 6.8054, 216 pips weaker than Reuters' estimate. China publishes June inflation data on Thursday, followed by second-quarter GDP figures the following Wednesday. The World Bank projects China's growth at 4.4% in 2026, easing to 4.3% in 2027, as the property sector adjusts and consumer confidence remains subdued. Beijing and Hong Kong announced joint measures on Tuesday to bolster currency, bond and gold trading in Hong Kong, positioning the city as a leading offshore yuan centre.

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Current Rate Table:

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Market Lookahead

Wed, July 8

• RBNZ Interest Rate Decision
• FOMC Minutes

Thurs, July 9

• Germany’s Trade Balance

Fri, July 10

• Germany’s HICP (Jun) inflation

Speeches from BoE, ECB and Fed members through the week

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