The US dollar remains on the defensive against both the euro and the pound, while showing mixed performance versus the yen. Recent data showed resilience in the service sector, with July’s services PMI climbing to 55.7 from 52.9, and the composite index rising to 55.1, both beating consensus estimates. This signals an ongoing recovery, even as higher tariffs imposed by the White House continue to fuel uncertainty and raise expectations for prolonged peak interest rates by the Fed.

However, concerns about the Fed’s independence persist, as investors weigh President Trump’s growing pressure on Jerome Powell. The market now awaits the nomination to replace departing Fed Governor Adriana Kugler, with a dovish candidate widely expected.

Eurozone: Euro Strengthens as Retail Sales Beat Expectations

The euro advanced against the yen, pound, and US dollar following strong June retail sales, which posted a monthly gain of 0.3% (up from -0.3%), and an annual rise of 3.1% (vs. 1.9% prior and 2.6% consensus), led by Spain’s remarkable 6.4% surge. This outperformance underlines the bloc’s resilience to the ongoing US-EU tariff standoff. On the downside, Germany’s factory orders slipped by 1.0% (vs. 1.2% forecast), reflecting persistent weakness in external demand for German goods.

United Kingdom: Construction Sector Disappoints Ahead of BoE Rate Decision

Sterling weakened versus the euro, held ground against the dollar, and posted mixed moves against the yen. July’s construction PMI fell sharply to 44.3 (from 48.8), missing forecasts of a rebound to 48.9, signaling mounting pressure on the broader economy. The Bank of England meets tomorrow, with most analysts expecting a 25bp rate cut to 4.00%. Yet, persistent inflation (headline CPI rose from 3.4% to 3.6%, core from 3.5% to 3.7%) and a second consecutive monthly GDP contraction (-0.1% in May) create a dilemma for policymakers: stimulate growth or tackle inflation.

Japan: Weak Wage Growth Clouds Outlook for Rate Policy

The yen lost ground to the euro, gained on the dollar, and was mixed against the pound. Real wages in June contracted by 1.3% year-over-year, marking the sixth consecutive monthly decline. While this was the smallest drop since January, high inflation continues to suppress household spending and slows economic growth, increasing the odds of a more dovish pivot by the Bank of Japan.

Australia: AUD Firms as Business Activity Rebounds, But Trade Data in Focus

The Australian dollar outperformed the yen, pound, and US dollar, but moved unevenly against the euro. AIG’s July manufacturing index improved to -23.9 from -29.3, while construction activity swung into positive territory at 1.3 (from -14.9). However, both sectors remain under pressure. Markets now await June trade data after May saw exports fall by 2.7% and imports rise 3.8%—continued trends could weigh on the AUD.

Oil: Rally Fades as US Sanctions Prove Milder Than Feared

Oil prices initially surged on a sharper-than-expected API crude drawdown of -4.2M barrels (vs. -1.8M expected) but have since slipped. The White House’s latest sanctions on India for buying Russian energy were softer than anticipated: tariffs on Indian goods were raised by just 25% instead of the threatened 100%. Markets now look to EIA stockpile data (due at 9:30 AM ET), expected to show a 0.2M barrel increase and further pressure prices.