The week ahead: UK banks surge as we wait for Bank of England

As we start a new week, the focus is the UK banking sector. Lloyds is higher by more than 6%, and Close is up more than 30%, as UK banks dominate during the European session, Barclays is also one of the top performers in the FTSE 100 today. This comes after the FCA said that the banks that made car loans would only need to pay a maximum of £18bn in compensation, and it was more likely that it would be £9bn. While this is higher than the amount the banks involved have set aside for the compensation, it is lower than some estimates of the scale of compensation.

The banking sector is likely to dominate this week, after the Eurostoxx 50 banking index made a record high last week. This did not halt European stock market underperformance vs. US stocks; however, it does suggest that the financial sector could dominate at the start of this week, and UK banks could outperform their peers. The FCA news could also help UK banks’ resilience in the face of the expected Bank of England rate cut that is due later this week.

US Dollar remains under pressure, as stocks rise

It was a dramatic end to the trading week on Friday, the surprisingly weak payrolls report was swiftly followed by the firing of the head of the US Bureau of Labor Statistics by President Trump. This move was broadly criticized over the weekend, especially as the US labour market data is considered to be the most accurate in the world, and there is no evidence that the data is better under Democrats than Republicans. However, the question is, do the markets care?

The answer is both yes and no. US and European stocks are set to open higher at the start of the week, after a bruising performance on Friday. US stocks fell  more than 2% last week, which compared to a 3.5% decline for the Eurostoxx 50. The dollar, which had been riding high in July, reversed recent gains and support for the greenback collapsed on Friday, and it is extending losses at the start of the week. The dollar is the third weakest performer on the G10 FX space on Monday morning, as the Swiss franc, the yen and the euro continue to extend gains vs. the USD. Thus, it seems like the dollar is still reeling from Friday’s events, while stocks have moved on and US futures are set to open higher later today.  

The dollar is more sensitive to domestic events, as it is a purer play on the US. While we expect President Trump’s interference with the BLS to only have a temporary impact on US assets, the fact that he has also been extremely vocal about criticizing the Federal Reserve for not cutting interest rates, could add to downward pressure on the dollar. In the longer term, it could erode the reputation of US assets, especially the dollar and US Treasuries. Treasuries have  outperformed in recent weeks and months, so there is room for Treasuries to come under pressure. We will be watching US Treasuries and the US dollar closely in the coming days to see if a political risk premium is attached to US assets.

The dollar has had a bad 2025, but there were signs that the dollar was making a turnaround in July, and it was the best performing currency in the G10 FX space last month. However, it has been a weak start for the dollar at this early stage of August. So far, there are only mild signs that a political risk premium is being attached to the dollar. However, the President’s actions could boost the attraction of gold. The gold price is higher by 28% YTD, suggesting that Donald Trump’s presidency is boosting the attractiveness of gold. The gold price rose another 1.3% last week, beating most other asset classes. In the current environment, we do not see gold losing its luster.

Looking ahead to this week, there are two events worth watching closely.

1. Will the next Fed governor get announced?

Over the weekend, Federal Reserve Governor Adriana Kugler  announced her resignation, which means President Trump will need to announce a new governor, possibly by the end of this week. It is expected that whoever Donald Trump announces to replace the governor could then become the new Chair when current Chair Jerome Powell vacates his position next May. The front runners include former Fed governor Kevin Warsh, current Fed Governor Christopher Waller, who bucked the trend and voted for a rate cut at last week’s meeting, and Treasury Secretary Scott Bessant. Whoever replaces Powell is likely to be a dove and is more likely to acquiesce to President Trump’s demands to cut rates. This has weighed on the dollar, but we will be watching to see what Treasuries do. If markets are uncomfortable about the President’s interference in central bank decision making, then any announcement of a new governor this week could trigger a rise in Treasury yields. Although this sounds counter intuitive, since Treasury yields should fall if future rate cuts are likely, Treasuries are also a way for investors to express their fears about politics.

After Friday’s weak economic data and the resignation of Kugler from the Federal Reserve, there has been massive recalibration in Fed Fund Futures markets. There are now 2.4 rate cuts priced in by the end of this year,  last week this was as low as 1.4 rate cuts. There is an 84% chance of a rate cut next month, a 72% chance of a cut in October, and a 79% chance of a further cut in December. The market has priced in a dovish Fed governor, which is weighing heavily on the dollar right now, although US Treasuries are underperforming at the start of this week, and yields are higher.

The ISM service sector data along with the initial jobless claims data that is due later this week, are both worth watching closely in case they shift the dial on the outlook for the US economy. Right now, the payrolls data is dominating, which punctured the narrative that the US economy is resilient to the sharp increase in global tariff rates.

2. The Bank of England

The market is expecting a rate cut from the BOE on Thursday, and there is a 96% chance of a cut priced in by the interest rate futures market. After Thursday’s cut, there is just under one further cut priced in by the end of the year. After Friday’s rapid recalibration in US interest rate expectations, the BOE is expected to embark on fewer rate cuts than the Federal Reserve, which is helping the dollar to stage  a comeback at the start of the new month.

The BoE is expected to cut rates to 4% from 4.25%, however, with inflation at 3.6%, we expect the BoE to be cautious about signaling further rate cuts, and there could be a 6-3 vote split at this meeting, suggesting that some BOE members do not believe that the Bank should be cutting rates at all.

The pound is the weakest performer in the G10 FX space for the past month, as a mixture of a weak growth outlook, expected rate cuts and political issues all weigh on the pound. As we lead up to this week’s BOE meeting, UK Gilts have outperformed their European peers but have underperformed US Treasuries. This could be a sign that bond investors believe that the ECB is done with cutting rates, especially after higher than expected inflation for last month, while they expect the Fed and the BOE to play catch up and cut rates at a faster pace compared to the ECB, going forward.

Thus, unless the BOE fights back against this narrative, the pound could remain under pressure, especially if the BOE cuts its growth forecast for the UK economy sharply.