28 July 2025: Retail sales performed well last month

The economy is not performing as the Government would have expected by now, given the measures that it has put in place since being elected. However, voters would have been entitled to expect those measures to have begun to have a positive effect by now.

The public has been fed a diet of the need for patience while Starmer, Reeves and Rayner sorted out the mess they inherited. In particular, the Chancellor had to get over her apparent surprise at the state of the country’s finances, despite being given sight of the Treasury’s numbers months before the election.

The Opposition Parties warned of Labour’s “tax and spend” record, but were told that this time it would be different. They have made a rod for their own back by caving in to the junior doctors and awarding them an inflation-busting pay deal, only to find a year later that they are back for more and are currently striking again.

Successive Conservative Chancellors stated that there could be no significant increases in pay without significant productivity increases, a warning that was ignored by Health Secretary Wes Streeting.

We are now at the end of the first full cycle of economic control from this Government, so things, if not improving considerably, should at least be showing marked signs that they are moving in the right direction.

Last year's Autumn budget was a PR disaster for Reeves. Having promised Labour’s manifesto that there would be no significant increases in taxation, she then hit the farming community hard with changes to inheritance tax, which will make it almost impossible for family-run farms to survive. This was compounded by the means testing of the pensioner’s winter fuel payment. Thankfully, this has now been reversed.

The spending plans that were announced in Spring were another disaster, with the Prime Minister having to perform at least three U-turns to stave off a revolt by well over 100 of his backbench MPs.

Inflation has meant that the Bank of England has not been able to cut interest rates to the level that had been expected. This has seen the economy splutter and increase the threat of a period of stagflation, where the economy experiences little to no growth, often measured by a stagnant or declining Gross Domestic Product, while prices for goods and services rise significantly, leading to a decrease in purchasing power for consumers.

This can also lead to the unemployment rate rising, meaning that a significant portion of the workforce is unable to find jobs.

The opinion polls show that the Conservatives are now trailing by some distance as the public sees Reform’s policies as possibly making a real change, even if Nigel Farage has not yet gained the trust of the electorate.

Labour has proved that there are no “training wheels” or “grace periods” for a Government which have no record of being in Government, even though this Government has “wasted” a year in “trial and error”.

Now is the time for the country to begin to see the benefit of some of the changes, and the “jam tomorrow” promises need to be fulfilled.

Last week showed the effect of the summer lull, suffering from low liquidity and a lack of volatility. It ended the week just 20 pips higher than it began, at 1.3838.

This week has the potential to be a significant watershed for the dollar. It will end with the July payrolls data being published on the first day of the month, which in itself is unusual and often leads to several estimates being presented as fact and leading to revisions next month.

Before that, there are several other important data releases, such as PCE inflation and another update of Q2 GDP.

The FOMC meets this week with a rate cut possible, although not seen as set in stone. The press considers Fed Chairman Jerome Powell to be “under pressure”, but he does not exude anything other than a calm confidence in the actions taken so far this year by the FOMC.

Inflation is far from controlled, and the uncertainty that has been set in motion by President Trump’s on-again, off-again tariff threats has been a significant contributory factor.

Powell’s attitude is very much being willing to “play the cards he is dealt, even if he must sometimes wish that he could tell the President to get a grip and leave the setting of monetary policy to those able to see the full picture.

As August 1st approaches, the market will be primed for the end of the deadline that Trump had set for the end of his negotiation period before tariffs come into force. The one deal that is still on the table is that with the European Union.

It is hard to say whether Ursula von der Leyen and her colleagues are playing hardball or simply “cowering in a corner” awaiting the inevitable.

The threat of a 30% tariff on top of the individual tariffs on motor vehicles, aluminium and luxury goods will not go away simply by being ignored, and if Friday comes around with no deal it could have a major effect on the economies on both sides of the Atlantic.

The imposition of a 30% additional tariff could easily blow the Eurozone economy off course, while Trump’s desired rate cut could be a thing of the past as inflation rises in the U.S.

Those traders and investors not on holiday will be playing wait and see, and hoping that there is sufficient liquidity to cope with the possible increase in volatility should a scenario take place where the Fed cuts rates, the headline NFP figure is <100k and no deal on trade is announced between Washington and Brussels. Last week, the dollar index fell to a low of 97.11 but rallied to close at 97.67. This could indeed be a “big week.”

President Donald Trump expressed hope he could resolve differences with European Commission President Ursula von der Leyen over their trading relationship ahead of a Friday deadline, but suggested pharmaceuticals may not be addressed in a deal.

Trump on Sunday reiterated his view that the chances are “probably 50-50 of making a deal” while meeting with von der Leyen at his golf resort in Turnberry, Scotland.

Last week, the ECB “pushed the pause button” on loosening monetary policy, having brought down interest rates by 200 basis points over the past year. This has not had any discernible effect on economic growth, which goes to show how dire the situation would have been without their intervention.

Policymakers pushing for another cut in interest rates face an uphill battle, with inflation at 2% and the economy withstanding trade turbulence. A hold looks like the baseline for September, too, after eight reductions since June 2024.

Key euro-area output data this week is expected to show the economy stagnated in the second quarter, the flip side of tariff-related front-loading that provided a temporary boost at the start of the year.

Economists in a Bloomberg poll expect Wednesday’s figures to show gross domestic product remained flat in the three months through June, after a 0.6% expansion in the first quarter. That performance was lifted by a sudden increase in trade, particularly visible in Irish figures, before Donald Trump’s expected announcement of global import duties.

A reversal of this effect is likely to weigh on growth. This drag adds to a softer domestic backdrop, with elevated uncertainty holding back household spending and business investment, according to Bloomberg.

Among the bloc’s biggest economies, Germany is forecast to see the worst performance, with output slipping 0.1% from the previous quarter. Spain is expected to keep growing by 0.6%, with France and Italy expanding just slightly.

While the numbers will be watched closely, the future development of the 20-nation bloc depends greatly on whether the European Union can strike a deal with the US that avoids the harshest tariffs threatened by Trump. Reports this week suggested negotiators are closing in on a deal that would set them at 15%, a scenario that German exporters “could live with,” according to IFO President Clemens Fuest.

European Central Bank President Christine Lagarde also highlighted the economy’s resilience after policymakers held interest rates steady for the first time in a year. While she acknowledged that front-loading played a role, she also cited “increased consumption and increased investment.”

Meanwhile, inflation data for the bloc on Friday is set to confirm the ECB’s confidence that it’s been brought under control. Consumer prices are forecast to have risen 1.9% in July, less than the previous month’s 2% and just below the central bank’s goal. A measure of underlying inflation probably remained steady, at 2.3%.

The Euro is playing a waiting game before a potential storm this week. Last week, it challenged its long-term resistance, rising to a high of 1.1789 before drifting back to close at 1.1742.

Have a great day!