Weather Boosts Growth but Questions Remain Beneath the Surface: Sterling Update

In this week's currency news from Moneycorp, market conditions remained largely unchanged despite ongoing concerns in the Middle East. Israeli Prime Minister Netanyahu firmly rejected the US's 15-point plan for Gaza, stating that Israeli forces would not withdraw until Hamas was "genuinely disarmed". Iran's stance on the Strait of Hormuz has shifted, calling for an end to the US blockade and compensation before reopening, but these demands are unlikely to be accepted by the US.

The release of the UK's June and Q2 GDP figures this week is anticipated, with a consensus forecast of 0.4% growth, driven by one-off factors like hot weather and the World Cup. However, these factors are not expected to be lasting, and higher UK interest rates remain unsupported given the weaknesses in the labour market, private sector earnings, and various sectors.

GBP has been holding up amid other economies' challenges, but the USD's weakness may be temporary. The latest US non-farm payrolls data came in poor, with a drop of 23,000 jobs in July, and labour force participation declining. This decline prompted a USD decline, enabling GBPUSD and EURUSD to advance.

Looking ahead, July CPI inflation and retail sales data are key. Inflation is expected to ease, while retail sales may have exceeded expectations due to hot weather and the World Cup, particularly in areas such as electrical goods, fans and air conditioning equipment, clothing and footwear, and seasonal food products. The ECB's summer hiatus means no public commentary until they return, potentially leaving FX markets vulnerable to new economic narratives.