21 July 2025

GBP

The Bank of England is facing renewed scrutiny over its quantitative tightening strategy, as recent volatility in the gilt market has exposed fragilities in demand for long-dated UK government debt.

Analysts from Oxford Economics and HSBC now expect the BoE to scale back or even pause sales of its remaining £163 billion in gilts with maturities over 20 years. Former MPC member Michael Saunders has gone further, suggesting the Bank may adopt a formal policy of permanently holding a significant portion of its long-dated portfolio to avoid further market disruption.

Governor Andrew Bailey’s testimony before the Treasury Select Committee on Tuesday will be closely watched for any signals on this front. Markets will be looking for clarity on how the BoE plans to balance financial stability with its inflation mandate, particularly as the next monetary policy meeting, on Thursday 7 August, draws closer. Currently, a cut is all but priced in, with the probability sitting around 90%.

On the data front, Thursday brings the latest UK Manufacturing and Services PMIs, both of which are expected to show modest improvement. The week concludes with Retail Sales on Friday, forecast to rebound to 1.2% after last month’s sharp -2.7% drop.

EUR

The European Central Bank is widely expected to keep rates unchanged at Thursday’s meeting, following seven consecutive cuts. With inflation stabilising and uncertainty mounting over US trade policy, markets are now pricing in just one more cut for the remainder of 2025.

Behind the scenes, EU diplomats are preparing contingency plans in case trade talks with the US break down. President Trump’s proposed 30% tariff on EU exports has raised the stakes, and any EU response would require political consensus among member states. Discussions are expected to intensify this week.

Eurozone Flash PMIs are also due, with expectations for a slight improvement, while the German Ifo Business Climate Index is forecast to rise from 88.4 to 89.2 - potentially signalling a modest uptick in business sentiment.

USD

The global economic narrative continues to shift under the weight of US trade policy. Bloomberg Economics now estimates that the average US tariff rate has surged from 2.3% in January to 13.3%, the highest since 1939. As these measures begin to take effect, Bloomberg has revised its 2025 US GDP growth forecast downward from 2.1% to 1.5%, with a projected $2 trillion hit to global GDP by 2027.

High-stakes negotiations between the US and EU are underway ahead of the 1 August deadline, with markets on edge over the potential for a 30% tariff on EU exports. Meanwhile, speculation continues around the future of Fed Chair Jerome Powell, though President Trump has recently called his removal “highly unlikely.”

The next interest rate decision is scheduled for next Wednesday, 30 July. Markets are expecting another hold from the Monetary Policy Committee.

This week’s US data includes Thursday’s weekly Unemployment Claims, expected to tick higher, and PMI figures, which are forecast to show a slight decline in Manufacturing and a modest rise in Services. Durable Goods Orders are expected to fall sharply from 16.4% to -10.3%, reflecting the impact of tighter financial conditions and trade uncertainty.

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.