Central Banks Hold Steady as Trade Risks Evolve

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Eurozone Market Update

At its July meeting, the ECB held rates unchanged, reiterating its data driven, meeting‑by‑meeting approach and adopting a subtly hawkish tone. President Lagarde highlighted the euro area’s resilience despite global trade uncertainty and reaffirmed that currency shifts influence, but do not dictate, the inflation outlook. The Governing Council signalled it would look through short‑term price volatility, noting that supply bottlenecks and the upcoming German fiscal stimulus could add modest inflationary pressure. Attention now turns to September’s meeting, which will deliver updated projections and possibly offer some further clarity on trade. A single additional cut this year remains our base case as we believe the case for multiple moves has weakened. Meanwhile, the EU–US trade agreement alleviated a key risk by establishing a 15% baseline tariff, with carve-outs for autos, steel, and aluminium, alongside significant energy and investment pledges. This framework materially reduces the risk of renewed transatlantic trade tensions.

_{Source: Bloomberg, data as at 31 July 2025}

UK Market Update

UK markets were unsettled in July after the government reversed planned welfare cuts, following an earlier U‑turn on winter fuel payments. This raised doubts over fiscal discipline and sparked speculation about Chancellor Rachel Reeves’ position, triggering a sell‑off reminiscent of Truss‑era turmoil: 10‑year gilt yields rose 15.8 bps to 4.61% and sterling fell 0.8% against the US dollar, before partially recovering after Prime Minister Keir Starmer reaffirmed support for Reeves. Fiscal risks remain in focus ahead of the Autumn Budget. With unemployment up to 4.7% from 4.6% and payrolls contracting for a fifth consecutive month, BoE Governor Andrew Bailey noted that policy remains sensitive to labour conditions. This supported our base case for a 25 bps cut in August, which duly came to pass. The scale and pace of easing in the UK remains data‑dependent.

_{Source: Bloomberg, data as at 31 July 2025}

US Market Update

The Fed held rates at 4.00-4.25% at its July meeting. However, two dissenting members favoured an immediate 25 bps cut, marking the first dual dissent since 1993. Chair Jerome Powell emphasised the need for more evidence before easing, noting that tariff-related price pressures could be temporary but warrant continued monitoring. Markets interpreted the tone as modestly hawkish, pushing 10-year Treasury yields up 5-7 bps and trimming rate cut expectations to three over the next 12 months, down from four. July’s payrolls rose just 73,000, well below estimates, with unemployment up to 4.2% and close to the Feds year-end projections of 4.5%. This increased the probability of a September rate cut to 87%, from 40% prior to the release, and doubled year-end cut pricing to 41 bps. In addition to its EU trade deal, the US imposed a 25% tariff on India, agreed to 15% tariffs and an investment pledge with South Korea, and confirmed 50% tariffs on Brazil, reducing overall trade uncertainty.

_{Source: Bloomberg, data as at 31 July 2025}

Looking Ahead

As we enter August, economic and policy uncertainties persist. In the US, we expect near-term data to remain mixed, with tariff impacts gradually feeding through and limiting the Fed’s visibility. A soft landing remains our base case, with one rate cut likely this year and further easing in 2026, which would bring the terminal rate to 3.00-3.25%. For the ECB, September is a crucial decision point, shaped by updated projections and developments in trade. We still see scope for one additional 25 bps cut this year, though the case for multiple moves has weakened given the ECB’s tolerance for near‑term inflation misses. In the UK, services inflation and wage growth keep the BoE focused, and following the August cut, which was our base case, a second cut is possible in November. Political U‑turns and fiscal credibility concerns remain a risk ahead of the Autumn Budget. Across markets, money market funds remain well supported amid ongoing uncertainty.

Chart of the Month

_{*Data reflects daily market pricing.
Source: Bloomberg as at 4 August 2025}

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