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EUR/GBP staged a deep pullback to 0.8609 last week but rebounded just ahead of 38.2% retracement of 0.8354 to 0.8752 at 0.8600. Initial bias is turn neutral this week first. Corrective pattern from from 0.8752 could still extend. But in case of another fall, downside should be contained by 0.8600. Firm break of 0.8752 will resume the rise from 0.8354 towards 0.8867 fibonacci level.

In the bigger picture, the structure from 0.8221 medium term bottom are not impulsive enough to suggest that it's reversing the down trend from 0.9267 (2022 high). But even if it's a correction, further rise is expected to 61.8% retracement of 0.9267 to 0.8221 at 0.8867. This will remain the favored case as long as 55 W EMA (now at 0.8485) holds.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Range trading should continue between 0.8201 and 0.9499, until there is clear signal of imminent breakout.

EUR/AUD resumed the decline from 1.8094 last week but quickly rebounded after hitting 1.7671. Initial bias stays neutral this week first. On the upside, break of 1.7972 resistance should resume the whole rally from 1.7245 through 1.8094 to 61.8% projection of 1.7245 to 1.8094 from 1.7671 at 1.8196. On the downside, below 1.7671 will bring deeper fall back to 1.7459 support instead.

In the bigger picture, price actions from 1.8554 medium term top are seen as a corrective pattern. Such pattern could extend further with another falling leg. But even in that case, downside should be contained by 38.2% retracement of 1.4281 (2022 low) to 1.8554 at 1.6922 to bring rebound. Up trend from 1.4281 is expected to resume at a later stage.

In the longer term picture, rise from 1.4281 is seen as the second leg of the pattern from 1.9799 (2020 high), which is part of the pattern from 2.1127 (2008 high). As long as 55 M EMA (now at 1.6414) holds, this second leg could still extend higher.

EUR/CHF fell further to 0.9265 last week but lost momentum again and recovered. Initial bias is turned neutral this week first. Price actions from 0.9445 could still be considered a corrective pattern. On the upside, above 0.9361 resistance will target 0.9428 resistance first. However, below 0.9265 will bring another fall back to retest 0.9218 low.

In the bigger picture, the down trend from 0.9204 (2018 high) might still be in progress considering that EUR/CHF is staying well inside the long term falling channel. However, with bullish convergence condition in W MACD, downside position should be limited in case of another fall. Instead, firm break of 0.9660 resistance will be an important sign of medium term bullish trend reversal.

In the long term picture, overall long term down trend is still in progress in EUR/CHF. Outlook will continue to stay bearish as long as 55 M EMA (now at 0.9855) holds.

Summary

Recent trade announcements have been billed as an escalation in the trade war. By our reckoning, the upshot is actually an effective tariff rate of 18%. That is the midpoint between the 16% rate in place prior to yesterday’s announcement and the roughly 20% rate that would have been in effect today in the absence of it.

Can You Keep Up?

Yesterday evening President Trump announced updated tariff rates of 10-41% on over 60 countries. This comes after Trump twice paused higher reciprocal rates originally announced in early April to allow for negotiations. Yesterday's announcement has been billed as a complete reshaping of global commerce, yet that is really not quite the way to think of this.

The reshaping already happened on April 2 when the President offered his opening bid in his campaign to force a new global trade system. The sweeping tariff orders announced yesterday effectively create a more practical framework and in many cases offer a lower tariff rate than would have been the case had things reset on August 1. Beyond the latest round of reciprocal rates, the Administration announced tariffs on copper products as well as a trade deal with the European Union and additional tariffs on Brazil this week. Yet, even with this latest codification of tariff rates, much remains in flux as deal-making continues and as the President continues to use tariffs for leverage in foreign affairs.

State of Play: What's in Effect and What Do we Know?

Here is a summary of the main tariff changes as of today, August 1:

• Copper: 50% on exposed copper products from every country (Effective August 1).
  • Previously: 0%
• European Union: 50% on steel, aluminum, copper. 15% tariff on all other exposed goods (including autos & parts). Official Executive Order not yet available (Effective August 7).
  • Previously: 50% on steel, aluminum. 0% copper. 25% autos & parts. 10% tariff on all other goods.
• Brazil: 50% steel, aluminum, copper. 25% autos & parts. 50% all other exposed goods (Effective August 1).
  • Previously: 50% on steel, aluminum. 0% copper. 25% autos & parts. 10% all other goods and additional 40% all goods.
• All countries, other than China, Canada, Mexico: 50% on steel, aluminum, copper. 25% autos & parts. 10-41% on all other exposed goods (Effective August 7).
  • Previously: 50% on steel, aluminum. 0% copper. 25% autos & parts. 10% on all other goods.

Nailing down the precise effective tariff rate in such an ever-changing environment is a never-ending task for economists and trade experts and a source of enduring uncertainty for businesses weighing cap-ex decisions. We estimate that once all these recent changes to tariff policy go into effect, it will lift the average trade-weighted tariff rate to ~18% in the United States, from 16% prior to these adjustments (chart). Despite the August 1 deadline bringing clarity for some countries, the can was kicked down the road for others such as China and Mexico. Trump extended the 90-day pause on China and imposed a similar pause on Mexico, making the start of November another key deadline.

Despite recent announcements, uncertainty lingers. The higher reciprocal rates are also not set to go into effect until next week on August 7, which leaves some time for potential changes to be made. There is also a grace period for product in shipment, meaning goods shipped within the next seven days and entering the country ahead of October 5 will be tariffed at the previous lower 10% rate. This could push firms that rely on goods from countries where rates have risen most dramatically, such as Switzerland and India, to rush and get orders shipped, which could again lead to a spurt of import growth and also delay any potential pricing impact from the escalation.

Another extension to the 90-day pause on higher reciprocal rates with China has also been floated by U.S. Treasury Secretary Scott Bessent this week, but Trump has not yet formally confirmed this. Additionally, while the Administration released a Fact Sheet on the trade deal with the European Union, it has not yet released a formal executive order, leaving some of the exact details of the deal unclear. This not only breeds confusion for businesses determining what rates their products are now exposed to, but prevents U.S. Customs and Border Protection from being able to accurately enforce tariff rates.

Summary of the pending changes:

• China: 90-day pause on higher reciprocal tariff extended (through October). No change to existing tariffs.
• Mexico: 90-day pause on higher reciprocal tariff (through October). No change to existing tariffs.
• Section 232 Tariffs: Investigations into Timber & Lumber (investigation started Mar-2025), Critical Minerals (Apr-2025), Pharmaceuticals (Apr-2025), Semiconductors (Apr-2025), Trucks (Apr-2025), and Aircrafts & Engines (May-2025) are ongoing. No tariffs added.
• Legal Authority: The tariffs Trump imposed under the International Emergency Economic Powers Act (IEEPA), which includes country-specific tariffs related to Fentanyl, immigration and trade-deficits, are being reviewed by a federal appeals court. In a hearing Thursday, media reports suggest judges express skepticism that the IEEPA gives the President such broad authority when it comes to imposing tariffs. It remains to be seen how the case is eventually decided, and these tariffs will remain in effect until a ruling is made, but if they are determined illegal, tariffs paid would be refunded.

We include all of this in our updated Tariff Tracker below, and as always will continue to update it as the details become available. Ultimately once you get past a certain threshold, the rejiggering of rates doesn't matter all that much at the macro level unless you adjust your major partners: China, Mexico, Canada and the European Union, which together accounted for around 60% of total U.S. imports last year.

As such, we'll be paying close attention to any adjustments to these partners. Where tariffs settle on China, for example, will be one of the biggest determinants of the average U.S. effective rate and how much revenue is ultimately raised through tariffs due to how much we import from the country. But given how elevated tariffs already are on the country, we expect it has already disincentivized import demand.

Section 232 tariffs also have our attention, though they come with a little more lead time. Unlike tariffs under the IEEPA, sector-level tariffs are implemented with Section 232 of the Trade Expansion Act of 1962, which requires an investigation and public comment period. It also means the legal-authority of these tariffs isn't currently being debated, meaning firms may be viewing them as more lasting. The investigation for the copper tariffs that went into effect today began in February, providing a six-month lead time. Most other investigations began in April, suggesting a bit more time before we see the results of those investigations. Tariffs on pharmaceutical products are getting a lot of attention given recent comments from Trump that they are coming. Even though the U.S. and the European Union have reached a trade agreement, that doesn't mean Europe is now safe from additional tariffs and pharmaceuticals in particular would sting given the large amount of product we bring in from the region.

While many economic indicators have revealed only a benign impact from tariffs so far, we have been arguing that the negative impacts of the tariffs are hiding in plain sight. Consumers have cutback on discretionary spending, and the soft July jobs report confirmed the concerns we have been articulating. To the degree that more negative news piles up, there is apt to be growing political pressure to back off from some of the more aggressive aspects of tariff policies.

Week in review: Volatile week between Trade Deals, the FOMC Meeting and the Non-Farm Payrolls report

The week kicked off with a risk-positive tone as headlines around a Euro–US trade breakthrough triggered a sharp gap higher in global markets. As a result, the US Dollar caught a strong bid, with the Euro and Yen notably losing ground amid improving US trade positioning and capital rotation into USD assets.

Midweek, the FOMC held rates steady as expected, but the tone was less dovish than markets hoped. With no signal for a September cut, rate futures quickly repriced, sending the Dollar even higher and pressuring risk assets globally. The move extended a USD run that was already in motion.

The Dollar Index, which touched 97.20 last Wednesday, ripped through the 100 handle, peaking near 100.20 by Friday morning. That strength started to shake broader markets, especially in FX, commodities, and rate-sensitive sectors.

Dollar Index 4H Chart, August 1, 2025 – Source: TradingView

Then came the NFP report. A messy release with mixed revisions sent shockwaves across asset classes.

Bonds and gold rallied hard on safe-haven flows, while equities took a hit as traders digested the combo of slowing growth and hawkish policy repricing.

It seems that the Goldilocks conditions for stocks have found some resistance.

Earnings Season

The strong Earnings season kept on providing good results, with notable tenace releases from 4 of the Magnificent 7 including Amazon, Apple, Meta and Microsoft.

This has kept boosting the Nasdaq and S&P 500 towards their most recent all-time highs before the mood got dampened by this morning's data.

The Week Ahead: Less market-moving than last week, but emphasis on US Services PMIs and the Bank of England rate decision

Last week was a composed salad of key data, particularly for the US – Between ADP employment, the July FOMC, GDP, Core PCE, and finally this morning’s NFP.

Now, Markets are on edge going into the weekend after a reality check that things are not all so easy in the end. Firms face the consequences of the Trump Administration’s policies, which will keep influencing the data as the August 1 deadline bell rings.

Asia Pacific Markets - US/China Trade Talks pursue, NZ employment data

This week saw the further pushback of US-China trade talks for 90 more days, leaving Markets awaiting again for more concrete developments between the Strongest nation and the World's largest manufacturer.

In terms of key data for APAC nations, we will be expecting the Caixin Services PMIs (Monday evening) and the Inflation Data (Friday evening) from the Middle Kingdom.

NZD traders will await their Employment numbers on Tuesday end-afternoon and some more key releases with Wednesday's RBNZ Inflation Expectations survey for Q3.

AUD traders will also have to attentive to the Australian trade balance numbers, also releasing on Wednesday evening.

Economic Data from Europe, UK and the US

The EU will not provide much high-tier data for Markets, so traders will have to look elsewhere for Euro movement – Focus on US Dollar demand (or lack thereof) if you want to get a clear picture of FX flows.

For the US, the most important data of the week is expected on Tuesday at 10:00 A.M. with the ISM Services PMI release (consensus 51.5, previous 50.8).

The Bank of England notably releases their rate decision on Thursday August 7th morning, with a cut from 4.25% to 4% largely expected.

CAD traders will have to take a look for three important data points next week: the Canadian Trade Balance (releasing on Tuesday), both Services and Manufacturing PMIs releasing on Wednesday and finally, the Canadian Employment data on Friday.

Don't forget the key Earnings that Equity markets are awaiting with names like Mcdonald's, Palantir, Disney and Pfizer.

For all market-moving economic releases and events, see the MarketPulse Economic Calendar. (High-tier data only)

Safe Trades and enjoy your weekend as next week should be another rollercoaster!

Canadian Highlights

• This week offered a clearer picture of business and consumer sentiment. Both surveys turned more negative in Q2, with domestic demand expected to remain soft and investment outlook flashing a weak signal for Q3.
• The retail sales report showed a sharp pull-back in May spending, led by autos. The advance estimate for June suggests a rebound, likely keeping quarterly goods spending steady overall.
• Longer-term consumer inflation expectations ticked slightly higher, though are unlikely to cause much concern for the BoC. July’s rate decision is essentially locked in as a hold – the real question is whether the Bank stays on hold in September and beyond.

U.S. Highlights

• President Trump announced a few trade deals this week, most importantly with Japan. Under this “deal” Japanese imports will still face a 15% “reciprocal” tariff, which is lower than the 25% threatened in the past. The deal included a $550 billion Japanese investment package, but the details remain scarce.
• Existing home sales weakened more than expected in June, with the level of sales holding near GFC lows. However, median home prices rose 2.0% y/y, a slight improvement from the month prior.

Canada – Not Strong Enough to Cheer, Not Weak Enough to Cut

This week’s economic calendar wasn’t expected to move markets. Equity markets drifted higher on optimism around U.S. trade deals, while bond yields edged up modestly after falling for most of the week.

Instead, the data offered a clearer picture of business and consumer sentiment, along with a detailed look at May’s retail spending. Both the business and consumer surveys turned more negative in Q2, reversing the cautious optimism that had emerged late last year (Chart 1). However, the interviews, conducted from late April through May, came after the temporary relief was granted to CUSMA-compliant trade, which helped ease some pressure. Recession fears among firms and households ticked lower, and businesses reported modest improvement in some areas affected by trade.

Despite easing recession fears, the tone from businesses was far from upbeat. Domestic demand is expected to stay soft. Firms’ future sales expectations turned negative for the first time in a year. The outlook for exports sales improved for all but the manufacturing and auto-related sectors. The investment outlook, while slightly better than last quarter, remains well below average and just a quarter of where it stood in late 2024. Even then, most firms are sticking to routine maintenance rather than expanding capacity or improving productivity – a weak signal for the third quarter investment outlook.

On the consumer side, the Bank’s new sentiment index showed a second straight quarterly decline, reflecting slowing spending growth. That was confirmed by May’s retail sales report, which showed nominal spending down 1.1% and inflation-adjusted spending down 1.4% month-on-month. The sharp pull-back was led by auto sales, as the tariff-driven front-loading in March and April reversed course (Chart 2). Core sales, which excludes auto sales and receipts at gas stations, were flat in nominal and real terms. The flash estimate for June sales points to a rebound, which could keep quarterly goods spending steady overall. But services will determine the broader trajectory of personal consumption – and if consumers act on what they are saying in the survey, it will likely remain subdued.

Meanwhile, longer-term consumer inflation expectations ticked slightly higher, though are unlikely to cause much concern for the Bank of Canada. Firms also expect somewhat stronger input costs due to tariffs, though most say that they’ll absorb them through profit margins given weak demand. Services inflation remains the sticking point. According to CMHC, new rents are falling thanks to increased supply. However, existing rent inflation remains elevated, even as it has slowed relative to last year.

In short, the data doesn’t signal a collapse, but it doesn’t suggest strength either. This week’s releases don’t shift the dial for the Bank with July’s rate decision now essentially locked in – the employment report sealed a hold. The real question now is whether it stays on hold in September and beyond. For now, markets are only pricing in half a cut by year-end.

U.S. – Trade Deals Trickle in Ahead of August 1st

This fourth week of July was light on the data front, with only housing data on the docket. Trade developments continued to dominate the limelight, with trade “deals” announced with Japan, the Philippines and Indonesia. Progress on the trade front appeared to prop up financial markets, with the S&P 500 up 1.3% on the week.

U.S.-Japan goods trade is worth about $227 billion, so a trade deal is certainly a welcome development. Imports from Japan ($148.4 billion last year) will now face a 15% so-called reciprocal tariff, which is lower than the 25% that had been threatened in the past. The deal also reportedly included a $550 billion Japanese investment package, but the fine details on it remain scarce. Shares of Japanese carmakers rose on the news, but the largest American carmakers expressed concern that the deal could put them at a disadvantage. The trade deal with the Philippines received less attention. Imports from the Philippines will face a slightly higher tariff of 19%, slightly higher than the 17% announced on Liberation Day. This adds to a string of recent agreements, including those with the U.K., Vietnam and Indonesia (Chart 1). But the more important ones, such as those with China, Canada, Mexico and the EU, have yet to be reached.

On the data front, the housing market continues to struggle under the weight of high mortgage rates. Existing home sales fell 2.7% m/m in June, coming in well-below expectations for a lighter pullback. Sales were down 8% from the end of last year and at a level of 3.93 million (seasonally adjusted annual rate) continued to hover near GFC lows. The months’ supply of inventory improved slightly, coming in at a seasonally adjusted 4.4 months from 4.3 in May. Amidst this backdrop, home price growth remained in the slow lane, but did see a modest improvement, rising to 2.0% year-on-year (y/y) from 1.6% in the month prior. With mortgage rates holding stubbornly near 7%, we’re unlikely to see a sustained turnaround in resale activity over the near-term. An improved interest rate backdrop expected later this year should help at the margin. High mortgage rates also continue to take a toll on the new home market, even as activity in this small corner of housing is holding up slightly better, with builder incentives likely providing some modest support (Chart 2).

Next week is sure to be more action packed. Aside from the potential for more trade deals to emerge ahead of Trump’s August 1st deadline, a host of important data reports are slated to be released next week. This includes second-quarter GDP, June’s PCE inflation, the July jobs report, and an FOMC rate-setting meeting. Market odds suggest the Fed is all but certain to keep the policy rate unchanged next week. That said, it appears that there will be at least one dissenter among the voters with Fed Gov. Waller recently urging for a July cut, while Fed Gov. Bowman has also expressed her openness to this. Signs of a growing divide within the Fed could lead to more volatility. In this vein, next week’s FOMC decision will be parsed over thoroughly for any of these signs and any potential clues as to how soon the committee could begin cutting rates, with September our current base case.

Summary

United States: The Week Data Converged to Reveal a Clear Slowing in Activity

• Roughly four months since Liberation Day and after a run of broadly benign initial readings on the economy, data this week revealed broad and unambiguous signals that growth has slowed markedly in the first half of the year.
• Next week: Trade Balance (Tues.), ISM Services (Tues.)

International: Foreign Central Banks at the Forefront

• Foreign central banks were at the forefront this week. Central banks in Japan, Canada, Brazil, Colombia and Singapore held monetary policy steady, while central banks in Chile and South Africa all delivered 25 bps policy rate cuts. In economic data, Eurozone Q2 GDP was firmer than expected, edging up 0.1% quarter-over-quarter, while July core inflation was steady at 2.3% year-over-year. China's July PMIs softened, suggesting slower growth over the second half of this year.
• Next week: NZ Labor Market Data (Wed.), Bank of England Policy Rate (Thu.), Banxico Policy Rate (Thu.)

Interest Rate Watch: To Cut or Not to Cut?

• As widely expected, the FOMC left the fed funds rate unchanged at the conclusion of its meeting on Wednesday. The Committee has now held the policy rate steady at 4.25%-4.50% for five consecutive meetings. A cut at the FOMC's next meeting in September is still up in the air, and upcoming economic data will be critical in determining the future path of monetary policy.

Credit Market Insights: Signs of Consumer Caution in Credit Card Borrowing

• Household finances are looking stronger than they have, but consumers aren't celebrating just yet. While debt levels are cooling and balance sheets are improving, rising savings and lingering uncertainty hint at a more cautious, uneven path ahead for spending.

Topic of the Week: Housing Prices Fall but Affordability Contracts

• Housing affordability remains under pressure despite recent declines in home prices. Although prices have softened slightly, elevated mortgage rates and rising ownership costs—including insurance, taxes and maintenance—continue to make homeownership unaffordable for many families. The Atlanta Fed reports that owning a median-priced home now consumes 53% of median household income, the highest on record.

Full report here. 

Tariffs on Canadian goods announced by the U.S. on July 31 do not significantly alter Canada’s economic outlook.

The International Emergency Economic Powers Act (IEEPA) tariff increased from 25% to 35%, but still only applies to the portion of trade that is not compliant with the free trade CUSMA/USMCA. That exemption is maintaining duty free access to the U.S. market for the majority of Canadian exports by our calculations, and remains in place.

Overnight tariffs hikes on other countries will still push the effective U.S. tariff rate higher to the top end of the 10-15% range that we have been assuming for our base case outlook.

This outcome, while impactful, remains less severe than the more negative scenarios that appeared more possible earlier this year. Canada should maintain among the lowest (if not the lowest) effective tariff rate of any major U.S. trade partner under the updated rules.

Canadian labour markets to show further signs of resilience

We expect employment and the unemployment rate ticked higher in July after an outsized 83,100 jobs’ gain in June pushed the unemployment rate unexpectedly lower.

One upside surprise in employment doesn’t negate months of prior softening, and the 6.9% unemployment rate in June was still up half a percent from a year ago, and is historically elevated.

The nuance is that much of the deterioration in the labour market had been concentrated in goods-producing industries, particularly manufacturing, which has lost jobs from international trade headwinds. Meanwhile, services sectors have been broadly resilient, accounting for nearly all of the job growth in Canada since last summer.

We expect this bifurcation to continue, resulting in modest job growth in July with the unemployment rate edging slightly higher to 7%. Education is a sector to keep an eye on as seasonal patterns around summer can create volatility. Beyond July, we believe deterioration in the labour market is likely approaching a bottom if it hasn’t already.

That outlook is contingent on the assumption of limited additional erosion in trade relations between Canada and the U.S. Evidence has been mounting, including from Statistics Canada’s early Q2 gross domestic product estimates, that existing U.S. tariffs on Canada are having a less severe impact than initially feared.

Exports to tick higher on oil price surge

But, that doesn’t mean tariffs aren’t damaging trade. June’s international trade data on Tuesday is expected to show Canadian exports ticked higher, but only due to a 10% jump in oil prices.

Export volumes likely declined again after accounting for the price changes, consistent with another significant drop in U.S. imports. Nevertheless, we expect those exports were still subject to lower average U.S. tariffs compared to exports from other major U.S. trade partners.

Negotiation between Canada and the U.S. on a trade deal is ongoing and the outcome is uncertain. But we expect growth in the economy will stay soft, but positive, and the Bank of Canada is not expected to cut interest rates again.

Week ahead data watch:

In Canada, we anticipate the trade deficit narrowed to $4.9 billion in June. Export growth was likely supported by higher oil prices. Meanwhile, a decline in motor vehicle unit production likely restrained import growth once again.

In the U.S., the trade deficit is expected to be about US$60.7 billion in June. Based on advance economic indicators, the goods trade deficit narrowed by 10.8% with both goods exports and imports declining by 0.6% and 4.2%, respectively.

Monday, Aug 4, 2025

Tuesday, Aug 5, 2025

Wednesday, Aug 6, 2025

Thursday, Aug 7, 2025

Friday, Aug 8, 2025

• We remove our previous call for a final September cut by the ECB and expect no further easing in 2025 and 2026, leaving a terminal deposit rate of 2.0%.
• The euro area economy has shown surprising resilience over the summer, with the outlook bolstered by the EU-US deal and accelerated German spending plans.
• Risks are still tilted towards a final cut later this year or in early 2026. Further softening of wage indicators could open the door for a final ‘insurance cut’

We revise our ECB call following the recent string of events, which have reduced the chances of a September cut substantially. We now expect the ECB to keep its policy rates unchanged throughout the entire 2025-26 forecast period. Markets discount roughly 12.5bp worth of ECB cuts by year-end. Previously, our main arguments for a final 25bp cut in September were 1) the elevated trade policy uncertainty, 2) the slowdown in domestic growth, and 3) the ongoing softening of wage growth. As we will elaborate below, trade policy and domestic growth arguments have lost considerable weight. Monetary policy is in a ‘good place’, and recent events have made it less likely ECB will conclude otherwise.

The European economy has proved surprisingly resilient to the elevated trade policy uncertainty that characterized the spring and early summer. Business confidence indicators have improved, and a declining euro area unemployment rate suggests that slack is still being depleted in the region. The US-EU trade deal has provided much-needed clarity, and the US tariff hike on European goods (roughly 10pp) fits well with the ECB baseline scenario from June. Even though we will eventually see some reversal effects of the heavy front-loading of goods in H1, the ECB will most likely interpret this as a temporary distortion without meaningful monetary policy implications.

Apart from trade policy, we have also revised our expected timeframe for the German fiscal policy boost. Earlier this week, the German cabinet agreed on a draft budget that will fast-track new public investments and a set of ‘growth booster’ initiatives, such as electricity tax cuts and accelerated depreciation rules for investments. Parliament will vote on the budget in September. If approved, the measures are set to drive up deficits as early as 2025. Even though the fiscal effect will likely not be felt before 2026, this is still a faster impact than previously assumed. Hence, the German fiscal boost risk coinciding with the lagged effects of the past year’s monetary policy easing, which will continue to strengthen.

Softening of inflationary forces leaves risks for policy rates tilted to the downside. Even though we are now calling for ECB policy rates to remain unchanged through 2025- 26, we still perceive the risk as being tilted to the downside. Euro area wage growth continues to moderate, and the most recent ECB tracker suggests that wage growth (including one-offs) is set to reach 1.7% y/y by Q1/2026. The July inflation report showed core services inflation declining to 3.1% y/y and the most recent momentum fell to the lowest since January, at 3.0% in the 3m/3m SAAR measure. Depending on the development in domestic inflation at the end of this year and the fiscal outlook by then, these factors could give room for taking rates slightly below neutral. However, based on Lagarde’s comments in the July meeting, more easing will require the ECB to reassess its baseline for the underlying inflationary outlook.