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Today's interest rate decision is expected to result in a rate cut and a three-way split among policymakers.
The pound weakened by half a cent against the euro and strengthened by a similar margin over the US dollar on Wednesday. Despite the usual stream of news, nothing could distract the focus from the Bank of England’s looming interest rate decision. Today’s vote should be a close call, although a quarter-point cut is expected to carry the day as policymakers look to tackle the “stag” part of stagflation.
On what is a big day for homeowners and buyers, house prices in the UK rose by 2.4% in the 12 months to July, beating expectations of 2.2% growth in the Halifax house price index. However, that was still the slowest pace of growth since July 2024. The average property value has now increased to £298,237.
Yesterday, the National Institute of Economic and Social Research (NIESR) thinktank served up a bleak appetiser to the Bank’s decision. According to the report, the chancellor is facing “an impossible trilemma” as she attempts to simultaneously balance fiscal spending rules and spending commitments with the pledge not to raise taxes. In order to restore market confidence, Reeves may be forced to raise taxes to fill the spending deficit, which the NIESR predicts will top £40bn by 2028-29.
Meanwhile, the UK’s construction industry contracted by more than expected in July. S&P Global’s sector survey fell from 44.3 from 48.8 in June, making it the steepest contraction since May 2020, when the construction industry was being pummelled in the first lockdown.
Germany’s trade surplus narrowed sharply from €18.5bn to €14.9bn in June. A slowdown in sales to the United States, combined with a 25-month high in imports, saw the surplus fall to its slimmest margin in almost a year.
Donald Trump’s trade envoy Steve Witkoff announced an additional 25% tariff on Indian goods yesterday, taking the levies India will face up to 50%. The president confirmed the move came in response to New Delhi selling oil to Russia, with whom Witkoff just so happened to be negotiating with regarding the war in Ukraine.
Make sure any upcoming transactions are protected against the risks of sudden market movements. Secure a fixed exchange rate now with a forward contract; call your account manager on 020 3918 7255 to get started.
GBP: Pound awaits close decision
Markets are betting on a three-way split in today’s Bank of England vote. For the pound, this lack of consensus points to an uncomfortable and tense economic moment. As policy opinions begin to diverge, expect things to get a little bumpy for the pound from midday onwards.
GBP/USD: the past year
EUR: Trade talks lift mood
The euro performed well against its rivals on Wednesday, strengthening on improved risk appetite and some signs of progress on the trade front. While European leaders agreed a deal with Trump last week, the euro was boosted by the eurozone delaying reciprocal tariffs for six months to flesh out the details, which could bring relief to large swathes of the economy.
GBP/EUR: the past year
USD: Fed highlights dollar’s quandary
The Federal Reserve’s Neel Kashkari made an appearance yesterday and his words did much to surmise the US dollar’s quandary. With the economy slowing, two further rate cuts this year seemed the correct pace, Kashkari said, although if tariffs began to cause higher inflation the Fed might pause or even hike again. In other words, the US dollar is caught between a rock and a hard place.
EUR/USD: the past year
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