Weekly recap

GBP: Inflation strengthened the case for higher UK rates

Sterling benefited after UK inflation accelerated from 2.6% to 2.9% in July, its first increase since March. This reinforced expectations that the Bank of England may need to raise interest rates again, despite evidence that employment and consumer spending are cooling. Friday’s 0.5% fall in retail sales did little to reverse the week’s positive sentiment, with markets continuing to price at least one further rate rise this year.

USD: Treasury intervention undermined confidence

The dollar weakened after the US Treasury unexpectedly increased its purchases of longer-dated government bonds in an attempt to contain rising borrowing costs. Although the measure helped stabilise the bond market, investors questioned why intervention was necessary and whether it represented a form of financial repression. This outweighed relatively hawkish Federal Reserve minutes, which showed that many policymakers would consider raising rates if inflation failed to ease.

EUR: Stronger business surveys supported the euro

Eurozone business activity expanded at its fastest pace since November. The composite PMI rose to 52.1, exceeding expectations, while manufacturing reached its strongest level in more than four years and new orders recorded their fastest growth in over three years. The figures suggested that the economy remains resilient despite elevated energy prices, strengthening expectations of an ECB rate rise in September and improving sentiment towards the euro.

Week ahead: 24–28 August

GBP: Bank of England expectations remain central

There are no major scheduled UK economic releases or Bank of England speeches next week, making interest-rate expectations the principal influence on sterling. Markets will assess whether July’s inflation increase is sufficient to justify another rate rise or whether weaker employment and retail activity will encourage the Bank to wait. Further evidence of persistent inflation—particularly through energy prices—would support sterling, while signs of slowing demand or a retreat in rate expectations could weigh on it.

USD: Core PCE inflation — Wednesday 26 August, 1:30 PM

The Federal Reserve’s preferred inflation measure will be published alongside revised second-quarter GDP figures. Core PCE inflation was 3.3% annually in June, and economists generally expect another relatively moderate monthly increase in July. A stronger reading would support the Fed’s more hawkish policymakers and could strengthen the dollar by reviving expectations of a September rate rise. A softer reading would suggest inflation is continuing to cool and could place further pressure on the currency.

EUR: ECB meeting account — Thursday 27 August, 12:30 PM

The ECB will publish the account of its July policy meeting, when it paused after raising rates in June. Markets will look for evidence that policymakers are preparing another increase in September, particularly following stronger activity data and persistent energy-driven inflation. A more hawkish account would reinforce expectations of further tightening and support the euro. Greater concern about growth, easing wage pressures or the economic consequences of high borrowing costs could weaken those expectations.

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