Bank of England decision to be the week’s main eventISM services PMI is only other highlight in relatively quiet weekMarket sentiment might struggle in aftermath of Trump’s August 1 tariffsBoE Faces Tough Balancing ActThe Bank of England will keep the central bank theme going over the coming week as it’s next in line to set interest rates. Policymakers are headed for a fraught decision amid a dilemma between taming resurgent inflationary pressures and supporting growth in a slowing economy.The UK’s headline CPI rate climbed to 3.6% year-on-year in June and the core rate also edged up. Aside from higher energy prices, whose effect is likely to be temporary, a bigger concern for the BoE is the substantial rise in food prices, with the British Retail Consortium warning that food inflation could hit 6% by year end.Yet, Governor Andrew Bailey has been beating the dovish drum lately, as the UK economic outlook has deteriorated following Chancellor Rachel Reeves’ Autumn budget in November. As widely predicted, Reeves’ hike in employers’ national insurance is prompting many businesses to cut back on staff, while job vacancies have plunged to the lowest since 2021.Earlier in July, Bailey sounded worried about slack opening up in the economy, which would normally be grounds for a rate cut. The drop in GDP in both April and May supports this view. But with the upswing in inflation potentially not over, can the Bank risk lowering rates further?The most likely outcome is that the BoE will trim rates by 25 basis points, sticking to its ‘gradual and careful’ approach of one reduction per quarter. But the decision will be split, possibly three ways, with some MPC members voting to keep rates on hold, others voting to cut by 25 bps, and one or two members even opting for a 50-bps reduction.The reaction in the pound will probably be limited in the event of a three-way split as it will be hard to get a clear message on the interest rate outlook. But should the vote turn out to be much tighter, with no MPC member voting for a 50-bps cut and Bailey having the casting vote, the pound could strengthen somewhat on the back of it.ISM Services PMI on Tap After FedAcross the Atlantic, the Fed is also facing an inflation problem but unlike the UK where stagflationary risks are more prominent, the US economy is for the moment humming along quite nicely with few visible scars from the trade war.It may take several months for the impact of the higher tariffs to fully reflect in the inflation data, while the cooldown in hiring appears to be offset by fewer people entering the workforce, amid President Trump’s migration crackdown. Fed chief Jerome Powell appeared to acknowledge this in his press conference that followed the July FOMC decision.Although two governors voted to cut rates by 25 bps, the overall tone of the statement and Powell’s commentary was very neutral, suggesting that the Fed is not ruling out a rate increase should higher tariffs and a tighter labour market push inflation higher even as it opens the door to a September cut.But it’s also possible that the labour market is much weaker than implied by the official data and tariffs may only modestly lift inflation. Investors are therefore keeping a close watch on the more forward-looking data such as the PMIs to gauge what’s happening to both price pressures and employment.Tuesday’s ISM services PMI for July could sway the US dollar in either direction depending on whether it tips the balance towards a rate cut or a prolonged pause.Trade Uncertainty Persists Despite DealsBut with not much else on the US agenda, traders will also be paying attention to the latest developments in the ongoing trade negotiations between the US and the remaining countries that haven’t signed a deal.The United States has reached trade deals with most of its major partners such as the UK, EU, Japan and South Korea. But there is no firm agreement with China to extend their trade truce beyond August 12 when the current one expires. More importantly, the White House is still engaged in talks with its closest neighbours, Canada and Mexico, to find a resolution to their trade disputes. Mexico has been granted an extension, Canada has not, and it now faces duties of 35% on its goods.Tariffs on all other countries have been set at a minimum of 10%, with several countries such as Switzerland and India receiving punitive rates of 39% and 25%, respectively. It’s possible that some countries might still manage to negotiate lower rates, as the new tariffs won’t go into effect until August 7 and there have also been indications that the White House is open to more talks.But markets are only just starting to realise that the new tariff levels represent a significant increase from the pre-trade war average and the implications of this on domestic inflation in America and on growth prospects around the world could be far more severe than anticipated by most investors. Hence, a fresh tariff-related volatility episode cannot be ruled out.Next week’s Treasury issuance further risks roiling markets if negative trade headlines knock confidence in the US economy, leading to poor demand at the auctions and pushing up the yields on the 10-year and 30-year bonds.Canada Misses Out on Trade Deal, Jobs Report EyedOne of the toughest negotiations during Trade War 2.0 have been between the US and Canada. President Trump has certainly not made things easy for Prime Minister Mark Carney, deciding to impose 35% tariffs on all goods that are not covered by the USMCA agreement.Doubts about whether Canada will be able to convince Trump to agree to reduced levies have pushed the Canadian dollar to two-month lows against the US dollar.For the Bank of Canada, the uncertain outlook hasn’t been its only headache as a pickup in underlying inflation has complicated matters for policymakers. However, at its July meeting, Governor Tiff Macklem said that “there are reasons to think that the recent increase in underlying inflation will gradually unwind”, while the announcement statement suggested that a further reduction in interest rates might be needed if the economy were to continue to weaken.One key indicator of how well the economy is faring will be Friday’s employment report. Canada’s labour market added a solid 83k jobs in June. Another strong print in July would lessen the need for an immediate cut, lending some support to the loonie.