USD Gains, GBP Struggles, and EUR Surges.

• USD Strengthens on Fed Rate Cut Bets: The GBP/USD pair dropped early in the week but rebounded, driven by expectations of accelerated Federal Reserve rate cuts after weak US economic data.
• Pound Sterling Under Pressure: The British Pound underperformed due to risk-averse sentiment and escalating Middle East tensions, compounded by uncertainty over future Bank of England rate cuts.
• Euro Hits Seven-Month High: The euro surged to $1.1008, its highest since January, as weak US economic data bolstered bets on Fed rate cuts, reducing the dollar’s appeal.
• Mixed US Economic Data: US Composite PMI fell below expectations, while ISM Services PMI exceeded forecasts, indicating ongoing inflation pressures and contributing to market volatility.
• ECB Faces Complex Outlook: The European Central Bank is expected to cut rates less aggressively than the Fed, balancing stronger growth in Spain and Italy against challenges in Germany, including rising inflation.

USD: Fed Rate Cut Speculation Boosts the Greenback

The GBP/USD pair started the week with a significant drop on Monday, briefly touching lows just above 1.2700 before rebounding to close near 1.2800. Early trading saw a surge in the US dollar as disappointing US economic data increased bets on accelerated rate cuts by the Federal Reserve. According to the CME’s FedWatch Tool, there’s an 85% chance of a 50 basis point rate cut on September 18th. Monday’s economic calendar was light, allowing markets to digest their current positions. The US Composite PMI for July came in below expectations at 54.3, down from a forecast of 55.0. However, the ISM Services PMI rose to 51.4, surpassing the expected 51.0 and recovering from June’s 48.8. Despite this, the ISM Services Prices Paid index increased to 57.0, indicating ongoing inflation pressures at the business level.

GBP: Pound Struggles Amid Risk-Off Sentiment and Middle East Tensions

The British Pound underperformed against major peers, except for some Asia-Pacific currencies, in Monday’s New York session. Market sentiment was dampened by concerns over US economic slowdown and escalating Middle East tensions, driving investors toward safe-haven assets like the Japanese Yen and Swiss Franc. Conflict between Israel and Iran escalated, with Hezbollah launching missiles at Israel and Iran vowing retaliation for the killing of Hamas leader Ismail Haniyeh by an Israeli airstrike in Tehran. Domestically, speculation about the Bank of England’s next move on interest rates is influencing the Pound. Last week, the BoE cut rates by 25 basis points to 5%, with a 5-4 vote split. BoE Governor Andrew Bailey emphasized the need to keep inflation low and avoid premature rate cuts, noting that services price inflation might rise slightly in August before easing later in the year.

EUR: Euro Reaches Seven-Month High Amid Weak US Data

The euro surged to its highest level in seven months on Monday, reaching $1.1008 as weak US economic data fueled expectations of Federal Reserve rate cuts, reducing the dollar’s appeal. This rally has minimized the euro’s losses for the year to just 0.6%, making it the second-best performer among the Group-of-10 currencies. While the European Central Bank has begun easing policy with a quarter-point rate cut in June, it is expected to lower rates less aggressively than the Fed. Markets are pricing in 125 basis points of US rate cuts this year compared to 80 basis points for the euro area. Recent weak US job and activity data have sparked fears of a faltering economy, providing a boost to the euro despite ongoing risks such as political instability in France and sluggish growth in Germany. The euro’s resilience has been notable, with speculation of an emergency Fed rate cut reflecting investor nervousness. In contrast, the ECB faces a complex situation, balancing stronger growth in Spain and Italy against challenges in Germany, including rising inflation.