Market Commentary 5th August 2025 – from Naigil Johnson

With the Bank of England set to meet this Thursday regarding an interest rate decision, Governor Andrew Bailey has made it clear that slightly higher inflation needs to be balanced against threats to UK growth. The UK economy contracted in both May and June, alongside the heightened global uncertainty and trade wars. The more recent stable global outlook appears to suggest an increased chance of the base rate coming down, with traders anticipating a quarter point cut in the next meeting, alongside forecasts suggesting another two rate cuts before the end of the year.

UK net mortgage approvals for house purchases rose to 64,167 in June 2025, up from the previous month and well above market expectations for a decline to 62,500. The stronger than expected data appeared to suggest that the housing market is regaining momentum, following the homebuyer tax break expiration in April.

Property prices also rose, with the UK Nationwide House Price Index showing a gain of 0.6% month over month in July 2025, rebounding from a 0.9% drop in June and exceeding forecasts of a 0.3% gain.

The European Union and the United States have reached a trade agreement, ending months of tension between the two major economic powers. President Donald Trump and European Commission President Ursula von der Leyen agreed to a 15% US tariff on European goods, half of the previously threatened 30%. In return, the EU will eliminate tariffs on certain US products.

Germany’s economy shrank by 0.1% in Q2 2025, following a revised 0.3% growth in Q1. This marks the first contraction since the middle of 2024, driven mainly by weaker investment in equipment and construction. In contrast, the French economy grew by 0.3% in Q2 2025, up from 0.1% in Q1 and surpassing expectations. This was the strongest growth since late 2024, largely fueled by a rise in inventories.

Germany’s annual inflation also held steady at 2% in July, slightly above the anticipated 1.9% and unchanged from June, according to preliminary figures. France’s annual inflation also remained unchanged, keeping steady at 1% in July 2025 and matching expectations, according to preliminary data.

The US economy grew by 3% in Q2 2025, rebounding from a 0.5% contraction in Q1 and surpassing the expected 2.4% growth. This recovery was mainly driven by a sharp drop in imports, which fell when businesses and consumers rushed to stockpile goods ahead of anticipated price hikes from new tariffs.

US Nonfarm Payrolls, which acts as a key indicator of the labour market and tracks job changes in sectors excluding farms, private households and non-profits, rose by 73,000 in July 2025, falling short of the expected 110,000. May’s figure was also revised down by 125,000 and June’s numbers were significantly revised down, from 147,000 to just 14,000. Combined, these revisions show that job growth in May and June was 258,000 lower than originally reported, suggesting the labour market may be cooling far more rapidly than initially anticipated. The US unemployment rate also increased slightly to 4.2% in July 2025, from 4.1% in June and in line with expectations.

Meanwhile, the Federal Reserve kept interest rates steady in the 4.25%–4.50% range for the fifth consecutive meeting. With the jobs data being worse than expected, investors appeared to support the idea of a Federal Reserve rate cut in September.

China’s official NBS Manufacturing Purchasing Managers’ Index (PMI) showed a slight decline in July 2025, marking the fourth consecutive month of contraction in factory activity. Both output and new orders slowed, while foreign sales experienced a notable drop. This suggests that the export boost ahead of US tariffs seen earlier has begun to fade and domestic demand remains weak. Additionally, China’s official NBS Non-Manufacturing PMI also dropped, reflecting the lowest level since late 2024, as growth momentum weakened amid ongoing trade uncertainties and adverse weather conditions.

The Bank of Japan made a unanimous decision to keep its benchmark short-term rate unchanged at 0.5% in July, holding borrowing costs at their highest level since 2008, in line with expectations.

GBP / EUR – Current 1.1459 Previous 1.1442

The Pound saw a modest gain of 0.15% against the Euro last week, while experiencing a more significant fall of 1.18% against the U.S. Dollar. The decline against the Dollar appeared to be driven by rising expectations of a Bank of England rate cut at the next policy meeting.