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Geopolitics and trade were on the menu at yesterday's crucial NATO summit.
Sterling largely traded sideways against its major rivals on Wednesday as the fallout from the Israel-Iran conflict and the annual NATO summit contributed to a risk-off tone.
Since Monday, GBP/EUR has strengthened by about half a cent. The pound and the euro have each advanced by close to two cents against the US dollar, which has been unable to sustain last week’s rally after the fragile ceasefire in the Middle East. The US dollar is now at a three-high low against a basket of its peers.
NATO leaders gathered in The Hague yesterday under a heavy cloud of geopolitical uncertainty. It was in this climate that the overwhelming majority of members signed up to target spending 5% of Gross Domestic Product (GDP) on defence and security by the year 2035. Sir Keir Starmer was among the signatories after a UK defence review issued the unsettling warning that the country must be prepared for a future attack on the British mainland.
Slightly unnerved by Donald Trump’s comments on Tuesday, member states were relieved to hear the president reaffirm his commitment to collective defence. President Trump confirmed he would support NATO “all the way” and hinted he would press Iran to sign a deal on its nuclear weapons.
Away from the anxious world of diplomacy, German consumers reported a marginally weaker mood in July’s GfK consumer survey. Interestingly, there was “a high willingness to save” among respondents, evidence of the ongoing uncertainty.
Federal Reserve chair Jerome Powell resumed his testimony before American lawmakers on Wednesday. During continued questioning over the path of interest rates, Powell once again stated his preference for waiting for the impact of tariffs to surface before committing to cuts.
And spare a thought for Elon Musk, as Tesla reported a 28% month-on-month drop in UK and European sales in May. That’s now five consecutive months that the auto giant has seen sales fall in the region, which comes despite strong demand for electric vehicles.
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GBP: Searching for the next cut
Sterling will likely be heavily influenced by the timing of the Bank of England’s next rate cut. While the details are up in the air, keep an eye on governor Andrew Bailey for an indication of his thinking. Bailey will deliver a speech today and markets will no doubt be tuning in.
GBP/USD: the past year
EUR: Spain tests tariff slack
Donald Trump singled out Spain for its refusal to commit to the 5% defence spending pledge agreed yesterday. The president suggested this decision could influence his trade negotiations with the eurozone, which could be a drag on the euro.
GBP/EUR: the past year
USD: Safe-haven effect fades
Even with the mood cautious, the US dollar’s gains have evaporated as the threat of another war fades. That trend may reverse at any moment, but its quick losses to European currencies will be a worry for those making payments in dollars.
EUR/USD: the past year
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