As the European Central Bank (ECB) prepares for its upcoming policy meeting, all eyes are on how it will respond to the euro’s sharp appreciation and its potential deflationary impact on the eurozone economy.
The ECB is widely expected to hold interest rates steady at its next meeting, following a 25-basis-point cut last month that brought the benchmark rate down to 2%. Market expectations, as reflected in swaps trading, suggest a greater than 90% chance of a pause in further easing.
However, growing attention is being paid to the 12% surge in the euro’s value against the US dollar this year. While the currency’s strength has raised concerns among policymakers about its possible downward pressure on inflation, central bank officials have so far avoided making definitive public statements.
At the ECB’s annual conference in Sintra, Portugal, one policymaker noted that the central bank should be cautious and “avoid any sort of overshooting” in the euro’s rise. The euro dipped slightly following these remarks. Despite that, analysts at Morgan Stanley believe markets may have overestimated the extent to which the ECB will push back against the stronger euro. Should the bank refrain from addressing currency concerns at this week’s meeting, they warn, the euro could strengthen further.
Uncertainty Around EU-US Trade Talks
Adding to the ECB’s cautious stance is the ongoing uncertainty surrounding EU-US trade negotiations. According to analysts at RBC Capital Markets, the ECB is unlikely to address the possible effects of new trade dynamics on inflation or growth until more clarity emerges.
“Faced once again with considerable tariff uncertainty, we think the ECB will try to say as little as possible at its July meeting,” RBC analysts commented.
Trump’s Tariffs and the U.S. Economy: A ‘Goldilocks’ Moment or Turning Point?
In the United States, investors are closely monitoring the economic impact of President Donald Trump’s recently imposed — and temporarily paused — tariffs on imports. Thursday’s release of the S&P Global Purchasing Managers’ Index (PMI) will offer key insights into how US businesses are responding.
Economists expect only a slight dip in manufacturing PMI from 52.9 to 52.5, and a slight increase in the services PMI to 53.0. Readings above 50 indicate expansion. Last month’s rebound in the PMI, from a low of 50.6 in April, had suggested renewed growth momentum.
However, strategists at Manulife John Hancock Investments caution that business survey data remains mixed and has yet to provide clear signals for market direction.
UK Economy Faces Mounting Inflation and Growth Challenges
In the UK, persistently high inflation and declining growth continue to unsettle investors. Inflation reached an 18-month high of 3.6% in June, with services inflation remaining elevated at 4.7%. At the same time, the economy contracted for a second consecutive month in May, while payroll numbers declined for the fifth month in a row.
Upcoming flash PMI data will be closely watched for signs of business activity in July, especially following an increase in employers’ national insurance contributions in April. Analysts expect a slight weakening in the composite index to 51.9, down from 52.0 previously.
Other important indicators this week include June retail sales and July’s GfK consumer confidence survey, both due Friday. Economists predict a modest recovery in retail sales, though weak data could dampen hopes that consumer spending will support growth in the second half of the year. Concerns are growing that the government may resort to further tax hikes in the autumn to stabilize public finances.
