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Analysis, Weekly Outlook

Outlook for the Week of August 4–8

August 5, 2025 Carlos Sereno

The week of August 4–8 is expected to be relatively quiet but could still hold meaningful developments for global markets. The spotlight will be on the Bank of England’s rate decision, as policymakers navigate the challenge of persistent inflation amid slowing economic growth. In the U.S., attention shifts to the ISM Services PMI, a key indicator in the Federal Reserve’s data-driven policy approach.

Meanwhile, escalating trade tensions—particularly newly proposed tariffs—may influence global market sentiment. Additionally, economic data releases from Japan, China, Canada, and New Zealand could impact regional monetary policy expectations, keeping investors attentive despite the lighter calendar.

Key Points to Watch

  • The Bank of England’s rate decision is the most anticipated event of the week.
  • The ISM Services PMI stands out as the primary U.S. data release.
  • Market sentiment may be influenced by new tariffs proposed by former President Trump, effective August 1.

Further Resources

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The Bank of England Faces a Delicate Balancing Act

The Bank of England (BoE) is in the spotlight this week as it prepares to deliver its latest interest rate decision. Policymakers face a complex challenge: addressing persistent inflationary pressures while supporting an economy that is increasingly showing signs of deceleration.

Headline CPI in the UK rose to 3.6% year-on-year in June, with core inflation also accelerating. While the recent rise in energy prices may be transitory, surging food costs remain a concern. The British Retail Consortium has warned that food inflation could reach 6% by year-end—adding pressure to the BoE’s policy calculus.

Despite these inflation signals, Governor Andrew Bailey has adopted a more dovish tone in recent weeks, citing a slowdown in economic activity following Chancellor Rachel Reeves’ autumn budget. Higher employer social security contributions have led to reduced hiring, with job vacancies falling to their lowest levels since 2021.

Bailey’s remarks suggest rising concern about economic weakness, a potential precursor to monetary easing. Contractions in GDP over April and May reinforce this view. Still, with inflation above target, the BoE must tread carefully to avoid premature rate cuts.

Markets currently expect a 25-basis-point reduction, aligned with the Bank’s “gradual and cautious” policy path, which anticipates one cut per quarter. A divided vote within the Monetary Policy Committee (MPC) is likely—with views split between holding steady, a 25 bps cut, or a more aggressive 50 bps reduction.

If Governor Bailey is forced to cast a deciding vote in the absence of support for a 50 bps cut, a modest rebound in sterling could follow, although a split vote may dampen broader market response.

U.S. Focus Shifts to ISM Services PMI After Fed’s July Meeting

In contrast to the UK, the U.S. economy continues to show resilience. While inflation remains a concern, the effects of recently proposed tariff increases are not expected to appear in inflation data for several months. Labor market tightness is also partly masked by lower participation rates, influenced by tighter immigration policies.

At its July meeting, the Federal Reserve maintained a neutral tone. While two governors supported a 25 bps rate cut, Chair Jerome Powell reiterated a data-dependent approach—leaving room for further hikes if inflation re-accelerates. At the same time, he acknowledged signs of weakness in the labor market not fully captured by official statistics.

This places greater emphasis on key indicators like the ISM Services PMI, due Tuesday, August 5. The results will help shape expectations for the September Fed meeting and influence the trajectory of the U.S. dollar, depending on whether the data supports further easing or a policy pause.

Trade Uncertainty Weighs on Global Market Confidence

Beyond monetary policy, global trade dynamics remain a source of concern. While the U.S. has secured agreements with the UK, EU, Japan, and South Korea, talks with China, Canada, and Mexico remain unresolved. The U.S.–China trade truce expires August 12, with no extension confirmed.

Canada faces 35% tariffs on a broad range of exports, lacking exemptions under the new U.S. tariff regime. Mexico has received a temporary reprieve, while Switzerland and India face duties of up to 39% and 25%, respectively.

With tariffs set to take effect Thursday, August 7, market participants are pricing in the potential macroeconomic fallout. Negative trade headlines could dampen sentiment and affect upcoming Treasury auctions—pushing yields on 10- and 30-year bonds higher and increasing pressure on financial markets.

Canada Braces for Key Economic Data Amid Trade Headwinds

Canada continues to face trade-related challenges, particularly its exclusion from recent U.S. agreements. President Trump’s imposition of 35% tariffs on non-USMCA exports has strained negotiations and weighed on the Canadian dollar, which recently hit a two-month low against the U.S. dollar.

The Bank of Canada acknowledged a rise in core inflation at its July meeting, though Governor Tiff Macklem maintained that inflation would likely moderate. Nevertheless, further rate cuts remain under consideration should economic data deteriorate.

All eyes are on Friday’s employment report, which will be critical in assessing the strength of the economy. After adding 83,000 jobs in June, another strong report could ease pressure on the central bank and provide near-term support for the Canadian dollar.

Yen Weakens as BoJ Holds Steady

The Japanese yen has depreciated sharply in recent weeks, as markets remain skeptical of the U.S.–Japan trade agreement’s ability to bolster Japan’s economic outlook. At its July meeting, the Bank of Japan (BoJ) offered no indication of imminent policy tightening. Markets currently assign a 70% probability to a rate hike before year-end.

Key data releases this week—including wage growth on Wednesday, August 6, and household spending on Friday, August 8—will be closely monitored. Strong figures may revive tightening expectations and provide support for the yen.

The BoJ’s Summary of Opinions, also due Friday, could offer a more assertive policy stance than Governor Ueda’s press briefing, potentially lifting sentiment around the yen.

Conclusion: Monetary Policy and Trade to Guide Global Sentiment

China’s upcoming trade data (Thursday) will offer key insights into export strength and external demand, while in New Zealand, employment figures and RBNZ inflation expectations will shape monetary policy outlooks.

While the economic calendar is relatively light, the week ahead carries significant weight for monetary policy direction, trade negotiations, and investor sentiment across major economies.

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