Growth Holds, Inflation Persists (3-7 August)

US GDP growth slowed to 1.5% in the second quarter, while Eurozone inflation accelerated to 2.9%.

Higher energy prices remained a key source of inflation pressure across major economies, supporting expectations that interest rates could stay higher for longer.

The Fed and BOJ both left interest rates unchanged, but neither ruled out further tightening. Three Fed officials backed an immediate hike, while the BOJ raised its longer-term inflation and growth forecasts, keeping additional rate increases on the table.

Currencies

Dollar Index: The Dollar Index rebounded to 100.3 but remained down 1.5% for the week, its biggest weekly loss in three months, and 1.3% for July. The Fed held rates steady for a fifth straight meeting, while limited guidance from Kevin Warsh reduced expectations of an immediate hike, although markets still price roughly a two-thirds chance of a 25bp increase in September.
Euro: EUR/USD traded near 1.1539, holding its recent recovery as a less hawkish Fed and firm eurozone inflation supported the euro. However, wider US-Eurozone rate differentials and geopolitical risks continued to provide support for the dollar.
British Pound: GBP/USD traded near 1.3484, extending gains after a three-day rally. The BOE's hawkish hold at 3.75% and persistent core inflation supported sterling, while softer US growth weighed on the dollar. Seasonal weakness in August, however, may limit further gains.
Japanese Yen: USD/JPY fell toward 156.35 after Japan confirmed coordinated yen-buying with the US Treasury. Weaker US data and expectations of further BOJ tightening also narrowed yield differentials, adding pressure to the pair.

Commodities

Gold Finds Its Footing

Gold rose above $4,050 after President Trump said Iran peace talks would resume, easing oil prices and inflation concerns. Attention now turns to Friday's US jobs report, with markets pricing a 68% chance of a September Fed hike.

Oil Gives Back July's Gains

Brent dropped more than 4% to around $84 after gaining over 20% in July. Trump's announcement on renewed Iran talks, together with another OPEC+ output increase, improved the supply outlook.

Silver Joins the Rebound

Silver climbed above $58, supported by easing inflation concerns after news of renewed Iran talks. Traders now await this week's US labor data for fresh policy signals.

Fixed Income

US 10-Year Treasury: The 10-year Treasury yield held near 4.74%, close to its highest level since January 2025. Sticky inflation, the Fed's cautious stance, geopolitical risks, and fiscal concerns continued to support long-term yields.
UK 10-Year Gilt: The 10-year Gilt yield traded near 5.05%, remaining close to multi-month highs after a hawkish BOE decision and a 23bp rise in July. Higher oil prices also reinforced inflation concerns.
Japan 10-Year JGB: Japan's 10-year yield traded near 2.81%, below its recent 2.91% high. Expectations of another BOJ hike, fiscal concerns, and government intervention in the currency market kept yields supported.
Germany 10-Year Bund: Germany's 10-year Bund yield held near 2.94% as firm eurozone inflation and higher global yields outweighed traditional safe-haven demand. The Italy-Germany spread remained stable at 134bp.

Economic Data

US Interest Rate

The Fed kept rates unchanged at 3.50%-3.75% for a fifth straight meeting. Three FOMC members backed a rate hike, while policymakers pointed to solid growth, strong investment, a resilient labor market, and inflation still above target.

Japan Interest Rate

The BOJ left its policy rate at 1.0% in July by an 8-1 vote. The bank lowered its FY2026 inflation forecast to 2.5%, raised its growth forecast to 0.6%, and increased both inflation and growth projections for FY2027, keeping the door open to further tightening.

Eurozone Inflation

Eurozone inflation rose to 2.9% in July from 2.8%, driven by higher energy prices. Core inflation increased to 2.5%, while Germany, France, Spain, and the Netherlands all recorded faster price growth.

US GDP

The US economy grew 1.5% annualized in Q2, below expectations and Q1's 2.1% pace. Business investment slowed, although equipment spending remained strong and residential investment rose for the first time in six quarters. Consumer spending strengthened, while net trade and government spending weighed on growth.

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