Sterling Holds Firm as UK Data Takes Centre Stage and Dollar Weakness Continues: Sterling Update

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The situation in the Middle East remains unresolved, with no talks planned for the week ahead and reports suggesting both sides are adopting firmer positions. The US is preparing fresh measures against Iran, although it remains unclear what form those measures might take given the breadth of sanctions already in place. Markets may question whether further action could extend to secondary sanctions on countries continuing to support Iranian trade, including China, and whether that could provoke a backlash.

Meanwhile, the Israeli Defence Forces struck targets in Lebanon over the weekend, reportedly killing a Hezbollah commander. That development risks placing further strain on the ceasefire agreement brokered by the US.

With tensions remaining elevated, markets will continue to monitor developments closely, including the approaching expiry of the US‑Iran ceasefire. For now, risks to energy prices appear skewed to the upside. Brent crude continues to test levels towards $90 per barrel, while US gasoline prices remain above $4 per gallon. That may become increasingly uncomfortable for the US administration as the November mid‑term elections draw closer.

UK labour market, CPI and retail sales figures for July in focus this week 

Last week was relatively quiet from a UK data perspective, aside from the Q2 GDP figures, which showed another solid quarter of growth despite ongoing headwinds from higher energy prices and supply chain disruption. That helped support sterling, taking GBP to multi‑month highs against the USD, although gains were more limited against most other major currencies.

Attention now turns to several key UK releases. First up is the labour market report, covering June data for unemployment, average earnings and employment, alongside July figures for payrolled employees and job vacancies.

Markets will pay particular attention to any signs of weakness in payrolled employment and vacancy numbers. Such developments would reinforce recent softness in private sector earnings and may carry greater significance than continued strength in contested Labour Force Survey measures or a modest fall in the unemployment rate.

CPI inflation and retail sales figures follow later in the week. Markets should avoid over‑fixating on the headline numbers in isolation. Higher headline inflation could be accompanied by softer core inflation measures, while any decline in retail sales volumes would come after several months of comparatively resilient consumer spending.

Overall, the data ought not to materially undermine GBP. However, sterling continues to approach several important technical resistance levels just above current spot rates. Those levels may prove challenging to overcome irrespective of the data outcome.

The US comes off a bruising week, with the dollar under pressure

Last week proved challenging for the US dollar. Economic data releases and survey evidence weakened the case for a Federal Reserve rate increase in September, with market‑implied odds of a 25bp hike falling from above 50% to below 30%.

Interest rate expectations also shifted materially. Markets no longer fully price an additional rate increase by the end of 2026, whereas only a few weeks ago investors were anticipating almost two further hikes before year‑end. Softer producer prices, weaker retail sales and another disappointing GDP release all contributed to that reassessment, leaving the USD on the defensive.

Can the dollar recover this week? The challenge is that the US calendar is relatively light. July industrial production data and the publication of the FOMC meeting minutes are likely to attract the most attention, while no Federal Reserve speeches are currently scheduled.

That leaves markets looking elsewhere for direction. Any surprises from the major economies could help stabilise the dollar. The greater risk, however, is that markets continue to test the weaker‑dollar narrative unless incoming data provides a convincing reason otherwise.

German ZEW and ECB speeches to prompt a reality check? 

The recent EUR/USD rally, which has taken the pair to its highest level since 17 June, has reflected increased concern over the US economic outlook rather than a marked improvement in Eurozone fundamentals. 

This week, attention is likely to shift back towards the Eurozone economy. Markets will focus on the German ZEW survey for August, alongside speeches from ECB Chief Economist Philip Lane and ECB President Christine Lagarde. 

Following the lull since the ECB’s late July meeting, where policymakers appeared to leave the door open to a further rate increase in September, these speeches may help reinforce market expectations for such a move. 

At the same time, economic conditions across the Eurozone remain challenging. Wildfires, volcanic activity and ongoing geopolitical developments continue to weigh on both current activity and the broader outlook. 

As a result, this week’s data and central bank communication could provide something of a reality check for the euro. Even if EUR/USD remains supported by US‑specific factors, the single currency may face a sterner test against other major currencies, in my opinion. 

Will Canadian CPI maintain the CAD’s strength against the USD? 

Canada releases July CPI inflation figures today. While US inflation data released last week pointed to some moderation in both headline and core measures, consensus forecasts anticipate firmer headline inflation in Canada, with core inflation expected to remain at 1.8% year‑on‑year.

The composition of the inflation data may prove more important than the headline reading itself. Markets will look closely at underlying price pressures and assess whether inflation strength extends beyond food and energy categories.

Canada remains one of the few major economies where core inflation remains below 2% year‑on‑year. That backdrop ought to discourage the Bank of Canada from tightening policy this year, in my view.

As for the currency, the CAD has enjoyed a strong run against the USD. However, technical considerations suggest the move may be entering a more challenging phase. Having sustained a break below C$1.40 against the US dollar, the Canadian currency is now moving into an area where additional gains may prove harder to achieve, in my opinion.

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