Important inflation data ahead

Important inflation data ahead

The Pound had a slightly negative week last week, as it ended lower following Thursday’s GDP growth report. The report has further reduced the prospect of an earlier-than-expected interest rate hike in the UK, which is currently forecast for the end of 2022. Wednesday will see the release of the latest inflation report, with a slight drop from last month’s headline inflation level of 2.5% is anticipated. However, any surprise reading above this level would likely mean a return to speculation about an earlier-than-expected interest rate increase. This, in turn, could see Sterling recover some of its recent losses. A not-unexpected small drop in house prices—the first seen this year—was announced this morning and points to a gradual return to normality as stimulus packages continue to be wound down. This may be reflected in the Public Sector Net Borrowing data for July being released on Thursday.

Slow recovery halts the EUR 

The Euro managed to gain against the pound but fall against the dollar last week. Much of the performance of the Euro is being held back by the European Central Bank’s (ECB) recent change in the inflation target, as the ECB is happy to let it rise above the 2% target level. Importantly, and in stark contrast to other major central banks around the world, the ECB has been very non-committal with their forward guidance. This is thought to mean that they’re well away from considering tapering asset purchases or raising interest rates. Recently, substandard GDP data but an uptick in inflation figures and forecasts are seeing the Euro underperform as the region recovers much more slowly than anticipated. There’s a busy week of data ahead, with both GDP and inflation figures being announced on Tuesday and Wednesday respectively. Second-quarter GDP is expected to see a reading of 2%, which, in stark contrast, is 150% lower than its counterparts in the UK. If economic sentiment and industrial output for June fall alongside a dip in European inflation on Wednesday, then we may well see a muted market.

Multi-year high US inflation  

Last week, Consumer Price Index data showed US inflation remains at multi-year highs. The labour market appears to be tightening, with nearly one million jobs added in each of the last two months, and the unemployment rate dropping to 5.4% in July, down from 5.8% in June. Strong jobs growth is expected to continue in the coming months. The US economy is growing significantly, with Real Final GDP Sales rising by 9.1% and 7.7% annualised in Q1 and Q2, respectively, restoring output to pre-pandemic levels. Looking ahead to this week, the Federal Reserve meeting minutes will be closely scrutinized as the market contemplates an early announcement on the timing of quantitative easing tapering. Retail sales figures for July will be one of the main highlights on the US data front.

Possible NZD interest rate hike

Most reports suggest that the Australian Dollar may continue to remain weak after Australia’s capital, Canberra, was the latest area to be ordered into lockdown. The lockdown, which is set to last for 7 days, has come into force following a single Covid case being discovered. It’s hard to see how the Australian Dollar can perform well with continuing lockdowns, the deteriorating Covid situation in Asia, and ongoing risks to the global economy.
GBP/NZD could see movement on Wednesday of this week, as the Reserve Bank of New Zealand is widely expected to be the first central bank of the developed global economies to raise their benchmark interest rates. New Zealand has managed to weather the Covid storm much better than other developed economies, producing better economic data releases and therefore are now in a position to start normalising economic policy. Any hike or hold in interest rates this week would likely see GBP/NZD impacted.

The CAD hopes for a strong week of data

The Canadian Dollar had a sluggish week last week, with influences from data in both the US and China producing very little in the way of major movements. However, the week ahead could paint a very different picture. All eyes will be on Wednesday’s Consumer Price data and Friday’s Retail Sales, with both expected to see an increase from previous releases. Friday could well provide some key movements, with CAD strengthening expected as Retail Sales are likely to reach 4.4% following a much lower previous reading.