Of Enrique Diaz-Alvarez*

Strong data on the US labor market denied the narrative of deceleration and essentially eliminated any possibility of reducing interest rates by the Fed in July. The dollar benefited from the rise of short -term yields and managed to end up in the middle of the main currency ranking (G10) for the week.

Priced mobility shows that current levels already contain many negative dollar news, which had the worst first half of the year since Nixon disconnected the currency from the gold rule in 1973. Noteworthy and the sterling, as well as the United States and the UK. of the episode with Liz Trars.

The absence of significant financial announcements from the basic economies means that news and duties news will be at the center again. The latter in particular are expected to determine the course of the markets, as the three -month suspension of the original duties announced by Trump expires on Tuesday.

At present, markets are facing this risk calmly, considering either agreements at the last minute or that new extension will be given, as Finance Minister Bessent has been implied. At the same time, we will closely monitor the developments in the UK bond markets, as they seem to be warning as a “canary in the coal mine” in terms of increasing unsustainability of public finances throughout the developed world.

Sterling

Markets are increasingly worried about the UK’s obvious inability to even move on to mild spending cuts. Labor MPs rebelled against the proposed cuts of social benefits of their government, while the strong reaction of markets to long -term bonds was a second loud blow to Starmer. This means that new tax increases are probably coming, while the labor market is noticeable. On the other hand, the pound has also fallen significantly against the euro, implying in our view that the currency is approaching levels of fair valuation. May macroeconomic elements (GDP, industrial production, constructions, trade balance) will probably have a limited impact due to delays.

Euro

Inflation in the eurozone continues its gradual declining to the ECB’s target, which is now close enough. Inflation expectations are also reduced, which means that there is a limited margin for the ECB to further reduce interest rates – probably not more than one more than another, as the 2% level is already considered quite encouraging. As the interest rate reduction cycle is completed, a key factor in the euro will be the difference in economic performance with the US and the final framework for trade with the US on the one hand. We are expecting developments on the second front this week, as the deadline for duties on July 9 is approaching.

US dollar

The US economy continues to demonstrate impressive resilience to the adversity it faces and pessimistic forecasts. The June employment report dismantled every idea of ​​labor market slowdown. Stable job creation was accompanied by a decrease in unemployment, while unemployment benefits remain close to historically low. Incidentally, the report further strengthened Fed President Powell’s waiting stance and his reluctance to reduce interest rates, despite Trump’s intense pressure. The adoption of the Republican budget, which provides for huge fiscal deficits for the immediate future, does not seem to have affected markets directly. But, as in the United Kingdom, we expect that bond markets and their willingness (or reluctance) to fund these deficits will be an increasingly important factor in making policy in the coming months and years.

*Chief Financial Risk Officer of International Payment Company ebury