Investors and forex traders are assessing the outcome of the Federal Reserve meeting that concluded yesterday. Policymakers voted nine to three to keep the federal funds target range unchanged at 3.50%–3.75%. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan supported a 25-basis-point rate increase, citing persistent inflation risks.
In its accompanying statement, the Federal Reserve said economic activity continued to expand at a solid pace despite elevated uncertainty, partly linked to the conflict in the Middle East. Productivity and capital investment remained strong, employment growth was broadly in line with labour-force expansion, and the unemployment rate was little changed. Inflation was still above the Fed’s 2.0% target, partly because of higher energy prices and other supply disruptions.
The growing number of policymakers favouring tighter policy has increased expectations that the Fed may raise rates before the end of the year. Markets are now assigning a greater probability to a September move, although future decisions will depend on inflation data, labour-market conditions and developments in the Persian Gulf.
The impact of geopolitical risks and changing interest-rate expectations on the US dollar was also examined in our forex market overview on the dollar and central bank policy.
Eurozone
The euro is weakening against the yen and the pound while showing mixed performance against the US dollar.
Investors are focused on preliminary gross domestic product data. The eurozone economy expanded by 0.4% in the second quarter, exceeding forecasts of 0.2%. Annual growth reached 1.0%. Across the European Union as a whole, GDP increased by 0.5% quarter-on-quarter.
Germany’s economy grew by 0.2% from the previous quarter, compared with expectations of 0.1%, while annual growth accelerated to 0.9%. Investment in infrastructure and artificial intelligence, higher government spending and resilient household consumption supported the wider eurozone economy. However, elevated energy prices and a further escalation of the Middle East conflict could weaken growth during the second half of the year.
Germany’s preliminary consumer price index rose by 0.8% in July, while annual inflation accelerated from 2.3% to 2.8%. Core inflation, excluding food and energy, was estimated at 2.4%. The figures add to inflation concerns, although future European Central Bank decisions will depend on data from the entire eurozone rather than Germany alone.
United Kingdom
The British pound is strengthening against the euro and the US dollar but weakening against the Japanese yen.
Investors and forex traders are evaluating the outcome of the Bank of England meeting, where policymakers kept the benchmark interest rate unchanged at 3.75%. Six of the nine Monetary Policy Committee members supported the decision, while Catherine Mann, Megan Greene and Chief Economist Huw Pill voted to raise the rate to 4.0%.
The Bank of England said domestic inflationary pressure continued to ease, although higher oil, gas and fuel prices created a risk of renewed inflation. Annual consumer price growth had slowed to 2.6%, but the Bank’s baseline scenario suggested inflation could reach 3.2% in the fourth quarter of 2026 as higher energy costs were passed on to consumers.
Inflation is then expected to slow gradually and fall below the 2.0% target in early 2028. The Bank of England stressed that future policy would depend on the duration of the energy shock and whether it produced secondary effects in wages, inflation expectations and corporate pricing.
Japan
The Japanese yen is strengthening against the euro, the US dollar and the British pound.
Japan’s household confidence index rose from 33.8 to 34.9 points in July, exceeding the forecast of 34.2 and reaching its highest level since February. Consumers reported improved views of living conditions, employment prospects, income growth and their willingness to purchase durable goods.
Stronger consumer confidence may support domestic demand, although the situation could deteriorate if imported energy prices continue to rise. Japan remains heavily dependent on oil and gas imports, leaving households and businesses exposed to disruptions in the Persian Gulf.
The Japanese government lowered its economic growth forecast for the current fiscal year ending in March 2027 from 1.3% to 0.9%. GDP is expected to expand by 1.1% in the following fiscal year. The outlook for private consumption was also revised down, while inflation may remain higher than previously expected because of energy costs.
Nominal wages are projected to rise by around 3.1% annually, which could support continued growth in real incomes if inflation gradually moderates.
Australia
The Australian dollar is strengthening against the euro, the pound and the US dollar while showing mixed performance against the yen.
June housing-market data showed that total building approvals rose by 7.2% to 18,328 after falling by 1.6% in May. Approvals for private-sector houses increased by 0.4% following a 2.4% rise, while approvals for multi-unit residential projects jumped by 17.8%.
The figures were stronger than expected and indicate continued activity in the housing sector. However, the industry still faces high financing costs, expensive construction materials and labour shortages, meaning that an increase in approvals may not translate into an equally rapid rise in completed projects.
Producer price data will be released tomorrow at 03:30 GMT+2. Quarterly growth in the index is expected to slow from 0.4% to 0.3%. A weaker reading could reduce the case for further monetary tightening by the Reserve Bank of Australia, while renewed wholesale inflation would support the Australian dollar.
Oil
Oil prices are edging lower after a sharp rise in the previous session, when Brent gained around 8.0%. Traders are taking profits while assessing Oman’s diplomatic efforts to secure safer passage for vessels through the Strait of Hormuz.
The fundamental backdrop remains tense. The United States and Iran have resumed attacks against each other, reducing the likelihood of a rapid diplomatic settlement and keeping a substantial geopolitical premium in oil prices. Tanker traffic through the Strait of Hormuz remains severely restricted, although it has not stopped completely.
The supply outlook will depend on the results of talks between Oman and Iran and whether the parties can establish a more durable halt to hostilities. Any further escalation could trigger another sharp rise in Brent and WTI prices, as a significant share of global oil and liquefied natural gas supplies passes through the Strait of Hormuz.
The latest report from the US Energy Information Administration also provided support to the market. Commercial crude oil inventories fell by 7.167 million barrels. Distillate stockpiles increased by 1.062 million barrels, while gasoline inventories were virtually unchanged, rising by only 0.007 million barrels.
More information on the effect of US–Iran negotiations on oil prices is available in our WTI crude oil forecast covering the proposed agreement and supply outlook.
