UK Inflation Surprise Dims Hopes For BoE Rate Cut In August; GBP/USD Spikes

Blue River

Economic

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Central Bank

Summary:

Hotter inflation clouds BoE outlook; wage and labor data now key for policy trajectory.

Key Points

●UK headline inflation jumped to 3.6% in June, while core inflation rose to 3.7%, sinking BoE rate cut hopes.

●Higher transport costs fueled inflation, offsetting a drag from housing and household services.

●Markets trimmed bets on an August BoE rate cut, sending GBP/USD above $1.34 post-CPI data

UK Inflation Data Surprises BoE Doves

Higher-than-expected UK inflation data sank bets on an August BoE rate hike on Wednesday, July 16.

The UK’s annual inflation rate (headline) rose to 3.6% in June, up from 3.4% in May, with core inflation accelerating to 3.7% versus 3.5% in May.

Key Data from the Office for National Statistics included:

●The Consumer Prices Index, including owner-occupier housing costs (CPIH), rose 4.1% in the 12 months to June after increasing 4% in May.

●The largest upward contribution came from transport, particularly motor fuels, offsetting a downward contribution from housing and household services.

●The Core CPIH (excluding energy, food, alcohol, and tobacco) increased by 4.3% in the 12 months to June, compared with 4.2% in May.

●Core CPI (excluding energy, food, alcohol, and tobacco) rose from 3.5% in the 12 months to May to 3.7% in the 12 months to June.

●The CPI services annual rate remained steady at 4.7% in June.

Hotter Inflation Clouds BoE Rate Cut Outlook

The inflation report followed weaker-than-expected GDP numbers, which had fueled speculation about a BoE rate cut. Notably, the UK economy expanded 0.5% in the three months to May, down from 0.7% in April. Meanwhile the economy contracted by 0.1% on a monthly basis, supporting a more dovish BoE policy stance.

Simon Pittaway, Senior Economist at the Resolute Foundation, commented on the GDP report, stating:

“With negative growth in the last two months of data, the UK’s late 2024/early 2025 growth spurt looks to be losing steam. You can see this more clearly in the 3m-on-3m data, which has fallen in recent months. Expect this to fall further in next month’s Q2 data as March’s upgraded monthly growth figure (0.4%) falls out of the 3m window.”

Ahead of today’s inflation figures, BoE Monetary Policy Committee member Catherine Mann remarked on inflation levels, stating:

“We have seen wage rates come down, so people are getting wage increases, but not at the rate in the past. And we’ve seen price inflation come down quite a bit, but it’s still a challenge because it’s still well above our 2% objective.”

June’s inflation numbers suggest the BoE may keep rates unchanged in August. However, May’s labor market overview report on July 17 could change the narrative.

Softer wage growth and rising unemployment may signal a pullback in consumer spending, dampening inflationary pressures. A weaker private consumption outlook may also impact the UK economy, further supporting a near-term BoE policy move. On the other hand, steady unemployment and higher wage growth may further temper BoE rate cut expectations.

GBP/USD Volatility Post-Inflation Data

Ahead of the inflation report, the GBP/USD dropped to a low of $1.33758 before rising to a high of $1.34005. Following the report, the pair briefly dipped to a low of $1.33935 before surging to a high of $1.34126.

On Wednesday, July 16, the GBP/USD was up 0.20% to $1.34065. The upswing likely reflected falling bets on an August BoE rate cut.

Looking Ahead

Traders now turn to Thursday’s UK labor market data. The Services PMI (July 24) and retail sales data (July 25) will also provide further clues on consumer spending trends and the broader economic outlook.

Weaker wage growth, slower services sector activity, and a pullback in retail sales could raise bets on further rate cuts. However, strong data may support a less dovish BoE stance, sending GBP/USD higher.

Stay updated here with real-time insights into BoE policy shifts and GBP forecasts, global macro trends, and central bank moves.

Source: FX Empire

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Glendon

Economic

Forex

UK inflation unexpectedly rose in June, according to official figures, adding to the pressure on the chancellor, Rachel Reeves.

The Office for National Statistics (ONS) said the consumer prices index rose by 3.6% last month, up from a reading of 3.4% in May. City economists had forecast an unchanged reading.

The rise comes as Labour faces intense scrutiny over its economic management after two months of negative growth and with speculation mounting over tax rises.

Reeves sought on Tuesday to shrug off Britain’s anaemic growth performance at her Mansion House speech, telling City bankers she would slash red tape to help reboot the economy.

The UK’s annual inflation rate has risen this year after dramatic increases in water bills, energy costs and council tax – complicating the Bank of England’s approach to cutting interest rates.

However, concerns are growing over the strength of the UK economy amid a slowdown in the jobs market and as Donald Trump’s erratic trade war weighs on the global outlook.

Threadneedle Street has cut its base interest rate four times in the past year, most recently in May, to 4.25%. This has eased some of the pressure on mortgage holders after borrowing costs were ramped up in response to inflation reaching a peak of 11.1% in late 2022.

City investors expect at least two further quarter-point cuts this year, with financial markets anticipating the next reduction at the Bank’s August policy meeting.

Source: GUARDIAN

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Economic

Tariff Impact Emerges Clearly in June CPI, Fed Holds Cautious Stance

The June Consumer Price Index (CPI) report revealed a 0.3% monthly increase in prices, with annual inflation climbing to 3.5% its highest since February. Analysts point to this acceleration as an early but now undeniable signal that U.S. import tariffs imposed under President Donald Trump are beginning to pass through to end consumers. This follows a 0.1% monthly rise in May and suggests a gradual but building inflationary trend.

Price increases were concentrated in tariff-exposed sectors such as clothing, furniture, and entertainment electronics. For instance, audiovisual equipment prices surged 1.1% month-on-month and are now up 11.1% annually an unprecedented gain for a category historically characterized by stable or falling prices due to globalized supply chains. These spikes are closely aligned with products that rely heavily on imports, indicating a strong causal relationship between tariff implementation and consumer price escalation.

Fed response cautious amid policy uncertainty

Federal Reserve officials have long warned that the inflationary impact of tariffs would appear with a lag, and June's data now validates those concerns. Boston Fed President Susan Collins reaffirmed this expectation, acknowledging that tariffs could slow growth and dampen employment while pushing prices upward. However, she added that strong household and corporate balance sheets could absorb some of the shock.

Despite Trump’s public pressure on social media for immediate rate cuts, the Fed appears unwilling to act prematurely. The CME Group’s FedWatch tool now shows less than a 5% chance of a cut in the July 29–30 meeting, while expectations for a 25-basis-point cut in September have slipped to 56.5%, reflecting growing skepticism that inflation will ease in time.

Core inflation and the PCE outlook reinforce policy hesitancy

Core CPI rose 2.9% year-on-year in June, below the expected 3% but still above May’s 2.8%. This figure excludes volatile energy and food costs and is central to the Fed’s inflation assessment. Meanwhile, the Fed’s preferred inflation gauge Core Personal Consumption Expenditures (PCE) is projected to climb above the 2% target in the second half of 2025. It already stood at 2.7% in May, with internal Fed projections suggesting it could reach 3.1% by year-end.

JP Morgan economist Michael Feroli estimates that the next round of tariffs, expected to take effect on August 1 and potentially targeting Mexico, Canada, and the EU, could add another 0.2–0.3 percentage points to core PCE inflation. If fully passed through to consumers, the increase could be as high as 0.4 points. This projection strengthens the Fed’s case for restraint in monetary policy easing.

Divergence among goods categories highlights uneven price transmission

While inflation is building broadly, price pressures remain more acute in goods sectors than services. Analysts point to significant variation across categories: furniture prices rose 1% in June, reversing previous declines, while outdoor equipment inflation slowed from 0.6% in May to 0.2%. Entertainment products, such as toys and sound systems often imported from China rose 0.8%, double the pace of previous months.

Gregory Daco of EY-Parthenon highlighted that such uneven price movements reflect the staggered nature of import cost transmission, as supply contracts and sourcing timelines differ across industries. However, the trend is consistent: goods heavily exposed to international trade are experiencing above-average inflation.

June’s CPI data confirms that the inflationary effects of Trump’s tariff regime are no longer theoretical they are now visibly embedded in consumer price metrics. While core inflation remains modestly below forecast, its composition reveals mounting pressure from import-intensive goods. With additional tariffs on the horizon and PCE projections rising, the Federal Reserve is likely to adopt a more cautious stance, resisting premature rate cuts despite political pressure. As a result, monetary policy is being shaped not only by macroeconomic indicators but also by geopolitical maneuvering, making the inflation outlook and the Fed’s response increasingly complex.

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Indonesia’s Foreign Debt Reaches New High as Government Borrowing Expands

Indonesia’s external debt reached $435.6 billion in May 2025, marking a 6.8% year-on-year increase, according to Bank Indonesia. Although the pace of growth has slowed compared to the 8.2% rise in April, the cumulative figure signals a growing reliance on foreign capital amid sluggish domestic revenue growth and expanding expenditure needs. Notably, government debt alone accounted for $209.6 billion an increase of 9.8% from the previous year.

Bank Indonesia emphasized that the overall debt position remains under control, with long-term obligations comprising the bulk of total debt. As of May, 85% of Indonesia’s external debt portfolio is categorized as long-term, which theoretically lowers rollover risk and minimizes short-term financial shocks. For government debt specifically, an even more favorable structure is observed 99.9% of it is long-term in nature. However, despite this maturity advantage, the size and speed of accumulation pose questions about the sustainability of fiscal policy, particularly if economic growth falters.

GDP-debt ratio and sectoral allocation offer mixed signals

The central bank stated that Indonesia’s external debt-to-GDP ratio sits at 30.6%, considered a manageable threshold by international standards. However, the effectiveness of this debt depends heavily on how it is allocated. Government foreign debt is concentrated in health and social services (22.3%), public administration, defense, and social security (18.7%), education (16.5%), infrastructure (12%), and transport (8.7%). These investments are aligned with long-term development goals, but they also reflect the financial burden of maintaining social services and economic infrastructure during a period of uncertain global trade and weakening domestic demand.

In contrast to government borrowing, Indonesia’s private sector external debt declined 0.9% year-on-year to $196.4 billion in May. This marked a steeper contraction than April’s 0.4% drop. The decline suggests that private enterprises are either reducing exposure to foreign-denominated liabilities or facing tighter access to offshore financing. With 76.5% of this debt classified as long-term, the private sector appears more cautious, likely reflecting subdued investment sentiment and a preference for risk mitigation amid volatile exchange rate dynamics.

Macroeconomic risks remain despite reassuring tone

While Bank Indonesia presents a reassuring view of the nation’s debt landscape, several macroeconomic headwinds warrant closer scrutiny. The persistent trade deficit with China, concerns over weakening consumer confidence, and uncertainties around global interest rate trajectories all amplify vulnerability to external shocks. Moreover, Indonesia’s recent overtures to reduce tariffs and purchase U.S. aircraft in exchange for favorable trade terms under Trump’s administration reflect an increasing dependency on geopolitical bargaining to sustain economic momentum.

Indonesia’s growing external debt driven largely by government borrowing illustrates a complex balancing act between maintaining developmental investment and managing fiscal risk. Although long-term maturities offer some insulation, the country’s rising interest payment burden ($34 billion annually) and shifting global financial conditions may limit policy flexibility in the near term. Without a robust rebound in domestic investment and export competitiveness, Indonesia’s current debt trajectory could become more difficult to defend, especially if global risk sentiment deteriorates or capital outflows accelerate.

Source: The Jakarta Post

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Economic

Trump Targets Powell Through Fed Renovation Dispute Amid Ongoing Rate Tensions

President Donald Trump’s renewed effort to remove Federal Reserve Chair Jerome Powell has taken an unexpected turn focusing not on interest rates, but on the $2.5 billion renovation of the Fed’s historic headquarters. Trump, long frustrated by Powell’s reluctance to lower interest rates, is now framing the extensive renovation project as wasteful and mismanaged, possibly laying the groundwork to dismiss the central bank chief for cause. Though such a move would be legally questionable, it reflects a deeper battle over the Fed’s independence at a politically charged moment.

At the heart of the dispute is the Marriner S. Eccles building and its adjacent facility in Washington, D.C., both of which are undergoing major upgrades to replace aging infrastructure and eliminate hazardous materials like asbestos. The project’s costs have ballooned by $600 million beyond its original estimate due to rising labor and material prices, construction constraints, and expanded environmental remediation. Despite these justifications, Trump has labeled the project “disgraceful” and described Powell’s oversight as indulgent, citing alleged features such as VIP dining rooms and rooftop gardens claims Powell has publicly denied.

Undermining central bank credibility through administrative scrutiny

White House officials, including Budget Director Russ Vought, have accused the Fed of misrepresenting the project’s scope and violating the terms of its initial 2021 planning approval by altering renovation plans without formal resubmission. James Blair, Trump’s deputy chief of staff and a member of the National Capital Planning Commission, has suggested that Powell’s testimony to Congress may have downplayed these changes. This introduces a secondary line of criticism: that the Fed’s decision to cut project costs by scaling back aesthetic elements was itself a violation of approved plans turning a cost-saving measure into a potential ethical liability.

While Trump cannot legally fire Powell over policy disagreements, he could attempt to do so “for cause,” such as misconduct or dereliction of duty. However, using the renovation as justification would set a dangerous precedent. The Supreme Court has signaled limits to presidential authority in removing central bank officials, reinforcing the importance of the Fed’s independence from political pressures. If Trump proceeds, it could spark investor uncertainty, weaken the dollar, and lead to higher borrowing costs as markets reprice U.S. political and institutional risk.

Fed defends integrity, requests independent review

Powell and the Fed have rejected the administration’s accusations. In testimony before the Senate Banking Committee, Powell categorically denied the existence of the lavish features criticized by the White House and emphasized that the project followed Congressional oversight, not executive direction. The Fed has also invited the independent inspector general to review the project’s expenses and governance, signaling transparency and a desire to maintain institutional credibility.

This political maneuvering risks damaging more than Powell’s reputation. If the administration succeeds in redefining internal facility management as a means of dismissal, it may erode the institutional foundations that insulate monetary policy from short-term political influence. The potential dismissal could trigger market turmoil, erode investor trust in the central bank’s objectivity, and compromise the Fed’s ability to act decisively during economic turbulence. Moreover, it introduces a causal link between administrative disputes and broader monetary uncertainty, as investors weigh not only inflation and interest rates, but also executive encroachment.

Trump’s attempt to leverage the Fed’s building renovation as a tool to remove Jerome Powell reveals a deeper conflict between political authority and institutional independence. While the legal basis for dismissal remains tenuous, the political optics and economic implications are substantial. Should this strategy advance, it could shake market confidence and set a precedent where central bankers are held hostage to executive grievances undermining the very foundations of independent monetary governance that have underpinned U.S. economic stability for decades.

Source: AP

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Foreign Currency Hoarding in China Reaches Record Levels Amid Yuan Weakness

China’s foreign currency deposits surged to $1.02 trillion in June 2025, reaching the highest level since March 2022, as both households and non-financial firms raced to secure dollar holdings. The People’s Bank of China (PBOC) reported that foreign exchange deposits increased by a record $165.5 billion in the first half of 2025 marking the largest net increase since the central bank began releasing this data in 2005. This phenomenon illustrates a growing lack of confidence in the Chinese yuan and broader economic prospects.

The driving forces behind this trend are closely tied to the persistent interest rate differential between China and the U.S. While the U.S. Federal Reserve has held rates elevated, Chinese rates remain low, discouraging the conversion of dollar deposits back into yuan. Becky Liu, Head of China Macro Strategy at Standard Chartered, noted that the wide interest rate gap is a central factor behind the low conversion rate. The incentive to hold dollars instead of yuan becomes stronger when the return on Chinese assets is comparatively weaker.

Corporate hesitation amid fragile growth outlook

Businesses are also pulling back from fixed asset investment, a key indicator of economic momentum, with figures from the first half of the year falling short of forecasts. This suggests a strategic shift toward capital preservation over expansion. According to Liu, firms are increasingly considering diversification abroad due to softening domestic demand and ongoing doubts about the yuan’s ability to recover even in the face of a declining U.S. dollar.

June’s trade surplus came in at $114.8 billion, the highest in five months, ensuring a steady inflow of foreign currency. Exporters have been a major source of this supply, converting overseas earnings into domestic deposits. Yet instead of strengthening confidence in the yuan, these flows have been parked in dollar deposits, indicating a preference for liquidity and safety over local reinvestment.

Yuan’s limited recovery underscores structural fragility

Despite gaining marginally in 2025 thanks in part to an 8% drop in the U.S. dollar the yuan has underperformed relative to other Asian currencies. Its appreciation has been constrained by persistent deflationary pressures, weakening consumer sentiment, and expectations of further rate cuts to stimulate growth. These macroeconomic conditions suggest that the recent stabilization in the yuan may be more temporary than structural.

Recent swap market data indicates that demand for U.S. dollars may be softening, as reflected in declining swap points. However, analysts caution that this cooling is likely to be gradual rather than decisive. With U.S. rates still materially higher and market expectations for a September Fed rate cut diminishing, the fundamental appeal of holding foreign currency remains strong. Liu warns that the yuan is more likely to depreciate than appreciate in the second half of 2025, driven by sluggish growth, potential capital outflows in equities, and falling exports.

China’s unprecedented surge in foreign currency deposits is a strong indicator of internal economic fragility and weakening confidence in the yuan’s near-term stability. While some technical signals suggest a modest slowdown in dollar demand, the broader structural trend fueled by interest rate disparities, soft domestic activity, and cautious corporate behavior points to continued accumulation of foreign exchange assets. Unless Beijing can meaningfully revive growth and restore investor confidence, foreign currency hoarding is likely to remain a defining feature of China’s financial landscape through the remainder of 2025.

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Asian Markets Weaken as Tariff-Led Inflation Reshapes Fed Expectations

The release of June’s U.S. inflation report showing a 0.3% rise in consumer prices reverberated across global financial markets. Though the increase was anticipated, it marked the largest monthly gain since January, reinforcing concerns that rising import tariffs are beginning to lift core consumer costs. Economists linked the price uptick in everyday goods such as coffee and furnishings directly to Trump’s aggressive trade policy, a connection that is influencing monetary policy expectations and weighing on investor confidence in Asia.

In response to the inflation data, U.S. Treasury yields surged to their highest levels in over a month, with the 10-year yield peaking at 4.495%. The increase in yields is consistent with the market’s reassessment of the Federal Reserve’s next steps. Traders now price in only 43 basis points of rate cuts by year-end, down from prior expectations. This upward movement in yields propelled the dollar higher, particularly against the yen, which touched 149.04 the weakest level for the Japanese currency since April 3. The dollar index held firm near 98.55, reflecting broad strength across major peers.

Asian equities react to Fed repricing

Equity benchmarks across Asia struggled under the weight of monetary tightening fears. Australia’s ASX and South Korea’s KOSPI both declined by 0.6%, while mainland Chinese blue chips dipped 0.1%. The Nikkei was flat, buoyed slightly by the weak yen and continued strength in tech names like Nvidia, which had rallied 4% overnight. Taiwan’s benchmark added 0.5%, while Hong Kong’s Hang Seng jumped 0.8%, continuing a tech-driven rebound.

Despite the broader macro pressures, some pockets of strength remained in tech-focused markets. Nvidia’s performance helped lift sentiment in sectors tied to artificial intelligence, partially offsetting losses in interest-rate sensitive equities. However, this support was not enough to reverse the regional risk-off tone, as most investors focused on the implications of U.S. inflation for global interest rate dynamics.

Bank earnings offer mixed signals

Corporate earnings remained in focus, particularly among major U.S. financial institutions. JPMorgan Chase and Citibank both reported second-quarter results that exceeded expectations. However, Wells Fargo revised down its 2025 net interest income guidance despite beating on profit, highlighting ongoing margin pressures. More clarity is expected from upcoming earnings releases from Goldman Sachs, Morgan Stanley, and Bank of America.

In commodities, oil prices stabilized after falling more than $1 in the previous session. Brent crude hovered around $69.16 per barrel, while WTI traded at $66.89. Gold saw a modest rebound to $3,332, and Bitcoin climbed 1% to $117,696 after retreating earlier in the week from its record high above $123,000. These price movements suggest investors are cautiously rebalancing exposure amid macroeconomic headwinds.

The combination of tariff-induced inflation, tightening U.S. monetary policy expectations, and mixed corporate earnings has created a challenging backdrop for Asian markets. While the inflation data did not surprise, its implications have triggered a repricing of risk across asset classes. The dollar’s strength and rising bond yields reflect a growing consensus that the Federal Reserve may delay rate cuts, reinforcing the view that Trump’s trade policies are not only reshaping inflation dynamics but also dictating the near-term direction of global capital flows.