The big three (June 2025)

1. US driving the sentiment

Recent market sentiment has been shaped by evolving US trade strategy, a cooling inflation report, and sobering global growth forecasts. A new agreement with China preserves high tariffs - totalling 55% - but secures rare-earth mineral access, critical for tech and defence industries. US-China trade talks continue, with discussions in London aiming to resolve export restrictions and maintain the 90‑day tariff truce.  

US inflation increased to 2.4% year-on-year in May, an increase of 0.1% from the April reading. While the controlled increase in inflation is reassuring, Fed officials will consider that the impact of tariffs may not appear in CPI data for several months and thus take a cautious path when considering monetary policy decisions over the rest of the year.

Meanwhile, the World Bank’s June Global Economic Prospects report reduced its 2025 global growth forecast to 2.3%, citing rising trade tensions, policy uncertainty, and elevated inflation in emerging markets as key drags. Though no global recession is expected, the World Bank warned this could mark the weakest growth outside of recessionary periods since 2008. It urged enhanced multilateral cooperation, trade de‑escalation, fiscal discipline, and investment in job creation to boost resilience and recovery.

2. Reeves unveils Spending Review

Chancellor Rachel Reeves’s June Spending Review unveiled a £113 billion investment package focused on long-term growth and economic renewal. Key pledges include £39 billion for social housing over a decade, £29 billion in annual NHS funding, and a defence budget rising to 2.6% of GDP by 2027. Additional spending targets rail, border security, and AI, while cuts to the Department of Culture, the Home Office, and foreign aid aim to maintain fiscal discipline without new tax rises.

However, the economic backdrop remains challenging. UK GDP shrank by 0.3% in April - three times the expected 0.1% fall - driven by sharp declines in services and manufacturing. US tariffs caused a record £2 billion drop in exports, particularly in automobiles and metals. With growth slowing and inflation still elevated, markets now anticipate further Bank of England rate cuts to support the economy amid tightening conditions.

3. ECB cuts, but takes a hawkish stance

The European Central Bank (ECB) reduced its key deposit rate by 25 basis points to 2%, marking its eighth consecutive cut since June 2024. While this move aligns with the ECB's efforts to counteract slowing growth and subdued inflation - now at 1.9%, below the 2% target - the bank signalled a cautious approach moving forward. President Christine Lagarde emphasised a data-dependent, meeting-by-meeting strategy, noting that the current monetary policy stance is "in a good place" and suggesting that the rate-cutting cycle may be nearing its end.

The ECB's decision reflects concerns over global trade tensions, which pose risks to eurozone exports and investment. Despite these challenges, the ECB maintained its GDP growth forecasts at 0.9% for 2025 and 1.1% for 2026, citing strong labour markets and increased household spending as supportive factors. Financial markets responded with a modest appreciation of the euro and a slight uptick in government bond yields, as investors recalibrated expectations for future monetary policy actions.