Global markets were calmer last week as easing tensions in the Middle East reduced demand for traditional safe-haven assets. The US Dollar lost momentum after weaker US employment data lowered expectations of further Federal Reserve tightening, while the Pound remained supported by the Bank of England's relatively hawkish stance despite signs of a slowing UK economy. Investors now turn their attention to central bank commentary, the latest Federal Reserve meeting minutes and fresh economic data from both sides of the Atlantic.

Last Week

GBP – Sterling Supported Despite Slowing Economy

The Pound finished the week on a firmer footing against the US Dollar and continued to outperform the Euro as markets became increasingly convinced that the Federal Reserve is less likely to tighten policy in the near term.

Sterling also benefited from the Bank of England maintaining a relatively hawkish stance. Speaking at the ECB Forum in Sintra, Governor Andrew Bailey reiterated that interest rate cuts remain "off the table for now", warning that inflation pressures could re-emerge as a delayed consequence of the Middle East conflict. His comments helped push UK bond yields higher relative to those in the Eurozone, making Sterling more attractive to investors and driving the Pound to its strongest level against the Euro in over a year.

While UK business activity continued to soften, markets took comfort from the Bank's commitment to keeping inflation under control. Political uncertainty surrounding Labour leadership speculation remained in the background, although investors were reassured after Andy Burnham reaffirmed his commitment to the government's current fiscal framework.

However, weaker UK Services PMI data highlighted that businesses continue to face persistent cost pressures and subdued consumer demand, suggesting growth remains fragile.

EUR – Softer Inflation Keeps ECB on Hold

The Euro saw modest support against the US Dollar as the Dollar weakened, but continued to underperform Sterling after softer inflation data reinforced expectations that the European Central Bank is unlikely to raise interest rates again in the near future.

Speaking alongside fellow central bankers at the ECB Forum in Sintra, ECB President Christine Lagarde struck a confident tone, suggesting inflation risks are becoming more balanced and stressing that the Eurozone remains resilient despite recent geopolitical uncertainty. However, with inflation continuing to ease, policymakers also indicated they are comfortable with current policy settings, reducing expectations of any further tightening.

The contrast between the ECB's increasingly neutral stance and the Bank of England's more hawkish messaging widened the gap in government bond yields, helping the Pound strengthen against the Euro throughout the week. Business activity remained mixed across the Eurozone, with manufacturing showing signs of stabilisation while broader economic momentum stayed subdued.

USD - Weak Employment Data Hits the Dollar

The US Dollar weakened over the course of the week as softer economic data prompted investors to scale back expectations of further Federal Reserve rate hikes.

Attention centred on the latest labour market figures, which showed hiring slowing more than expected and reinforced signs that employment conditions are beginning to cool. Manufacturing activity continued to expand but at a slower pace, while easing price pressures suggested inflation may continue to moderate.

Federal Reserve Chair Kevin Warsh maintained a cautious approach, stressing that policymakers remain focused on inflation and will assess incoming data before making their next decision. However, with employment weakening and inflation pressures easing, markets reduced expectations of further tightening, weighing on the Dollar.

Meanwhile, easing tensions in the Middle East helped restore risk appetite. Although negotiations between the US and Iran remain unresolved, lower oil prices and the continued movement of shipping through the Strait of Hormuz reassured investors that the immediate inflation risks from the conflict had eased.

What's Coming Up This Week

GBP - BoE Commentary in Focus

The UK calendar is relatively light this week, leaving Bank of England speeches as the main focus for Sterling traders.

Markets will be looking for any changes in policymakers' tone following recent signs of slowing business activity, while the publication of the Bank's Financial Stability Report will provide further insight into the outlook for the UK economy and financial system.

Political developments will also continue to be monitored as investors assess whether recent leadership speculation could have any longer-term impact on market confidence.

EUR - Retail Sales and Central Bank Signals

Attention in the Eurozone will turn to retail sales data and further comments from European Central Bank officials.

Investors will be looking for confirmation that easing inflation is translating into improved consumer spending while also assessing whether policymakers continue to signal a prolonged pause in interest rate changes.

Germany's latest inflation figures will also be watched closely for further confirmation that price pressures continue to moderate.

USD - FOMC Minutes Take Centre Stage

The focus in the United States will be the release of the latest Federal Reserve meeting minutes, which should provide greater insight into how policymakers are balancing slowing economic data against inflation risks.

Markets will also watch the ISM Services PMI and weekly jobless claims for further evidence on the strength of the US economy.

With the next Federal Reserve meeting approaching, every piece of economic data and every comment from Fed officials is likely to be closely scrutinised for clues on the future direction of US monetary policy.

Final Comment

Although geopolitical tensions have eased slightly, markets remain highly sensitive to developments in the Middle East. For now, falling oil prices have helped calm inflation fears and supported risk sentiment, but with negotiations between the US and Iran still unresolved, any deterioration could quickly reignite volatility across currency and commodity markets.

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