Currency Market Digest: 17th June 2025

What happened last week?

UK Chancellor Rachel Reeves will announce a £275bn UK infrastructure plan, starting with a new financing model to boost private investment. Projects include road upgrades, railways, and clean energy, with focus on regions like the north. A new “structure fund” will help bridge public-private funding gaps. Labour aims to deliver key projects and drive economic growth, despite political risks and constraints on public borrowing under current fiscal rules.

In May, UK manufacturers reported weaker demand from the US, dropping it from their top three growth markets. Exports to the US fell in April, reversing gains. Manufacturers face rising costs and economic uncertainty. Despite strong domestic output, weak global demand and trade friction are hampering export growth, especially to key markets like the US.

The UK and Spain agreed to Gibraltar border checks by Spanish officials, enabling easier movement and avoiding hard borders post-Brexit. Gibraltar remains outside the EU’s customs union, but goods and people flows will be eased. Talks continue over customs arrangements, airport access, and sovereignty concerns, facing domestic political scrutiny.

Germany plans to prioritize defense spending in the next EU budget while opposing joint debt and new taxes. It supports cuts and reallocations, resisting proposals for EU-level borrowing. Berlin backs higher national contributions, especially for defense, innovation, and migration. Disagreements persist over VAT revenues, debt repayments, and funding gaps, with Germany seeking fiscal restraint and efficiency amid growing EU ambitions and financial pressures.

Southern European bonds, especially in Italy, Spain, and Portugal, declined due to political uncertainty and reduced ECB support. Investors demand higher yields amid fiscal concerns and upcoming elections, with Greece being an exception due to strong growth. Rising debt levels and weaker credit ratings heighten risks, while markets brace for potential volatility if fiscal credibility is not maintained.

Donald Trump’s renewed trade threats pushed the dollar to a three-year low, driven by market fears over tariffs and rising geopolitical tensions. His comments about using tariffs as a “weapon” unsettled investors. Additional pressure came from soft U.S. inflation data, expectations of lower interest rates, and reduced dollar demand from key trading partners. Analysts warn continued global uncertainty may keep the dollar weak in the near term.

US inflation rose 2.4% in May, slightly below expectations, suggesting Trump's tariffs have had limited impact on prices so far. Core inflation held steady at 2.8%. Markets expect the Fed to hold rates steady in June, despite political pressure from Trump. Inflation is forecast to rise in coming months, possibly prompting rate cuts in September or October. Analysts warn of growing economic and political uncertainty influencing future Fed decisions.

Donald Trump’s allies are urging Canada to meet NATO’s 2% defense spending target, warning of weakened U.S.-Canada ties if unmet. With Trump possibly returning in 2024, Republicans stress stronger allied commitments. Canada remains below target, despite U.S. pressure and internal debates. The upcoming G7 summit is expected to spotlight NATO burden-sharing, adding urgency. Trump’s advisors suggest future defense cooperation hinges on spending compliance. As global tensions rise, Canada’s defense stance could shape its diplomatic standing with the U.S. and NATO.

Argentina’s consumer prices rose 1.5% in May, down from 2.8% in April — the slowest monthly inflation since early 2022. The sharp deceleration marks a key success for President Javier Milei’s austerity program, which includes spending cuts, a peso freeze, and deregulation. While Milei celebrates the progress, poverty remains high and the economy is in recession. His government is negotiating with the IMF and advancing reform bills in Congress, aiming for long-term stabilization despite social tensions and opposition resistance.

Donald Trump announced a preliminary trade deal with China, pending approval from President Xi Jinping, pausing further tariff hikes. The agreement includes major agricultural purchases by China and U.S. concessions on tariffs and currency. Trump hailed it as a significant breakthrough, though details remain limited. Markets responded positively, but analysts remain cautious. U.S. and Chinese officials continue working toward a broader deal. Meanwhile, tensions persist over technology and security, and Trump’s approach faces bipartisan scrutiny in Washington.

Rising Japanese government bond yields, fueled by high inflation and increased government borrowing, have intensified pressure on the Bank of Japan (BoJ) to adjust its ultra-loose monetary policy. Despite inflation above its 2% target, the BoJ remains cautious about significantly reducing bond purchases. Analysts suggest the central bank faces a delicate balancing act between managing market stability, controlling inflation expectations, and maintaining credibility amid mounting market scrutiny.

China’s industrial output growth slowed in May, driven by weak exports and lingering uncertainty from trade tensions with the US. However, retail sales grew faster than expected, highlighting stronger consumer spending. Real estate remains weak, with declining investment and ongoing developer defaults, though home prices fell less steeply. Beijing continues supportive policies to stabilize the economy amid challenges in manufacturing, property market instability, and external demand pressures.

What to watch out for this week?

All times are GMT

• All Day - ZAR South Africa National Holiday

• 03:00 - JPY Bank of Japan Interest Rate Decision
• 12:30 - USD US Core Retail Sales and Retail Sales (MoM) (May)

• 06:00 - GBP UK CPI (YoY) (May)
• 09:00 - EUR Eurozone CPI (YoY) (May)
• 12:30 - USD US Initial Jobless Claims
• 18:00 - USD US Fed Interest Rate Decision

• All Day - BRL Brazil National Holiday
• All Day - USD US National Holiday
• 07:30 - CHF Swiss National Bank Interest Rate Decision
• 11:00 - GBP Bank of England Interest Rate Decision
• 12:30 - USD Initial Jobless Claims

• All Day - NZD New Zealand National Holiday
• 12:30 - USD Philadelphia Fed Manufacturing Index