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Rate hike ahead?

'Some modest tightening' 

Last week, the Pound traded in a tight range but finished in positive territory on a trade-weighted basis for the third week in a row. Last week's main focus for Sterling investors was the Bank of England and its latest monetary policy announcement. Markets are closely watching central banks around the world to see where interest rates will begin to rise first. Bank of England Governor Andrew Bailey said that 'some modest tightening' will be needed to reach the bank's 2.0% inflation target. Still, he continued to say that inflationary pressures would likely be temporary—in the same vein as other central banks. It's a quiet week for UK data, with only UK industrial, manufacturing, and preliminary growth estimates due for release, leaving the Pound vulnerable to other geopolitical developments.

Policy divergence  

The trade-weighted Euro index registered its weakest reading since July 2020 last week, as the European Central Bank's monetary policy approach stood at odds with some other major central banks around the world—a theme we've seen before in recent years. The Euro to US Dollar exchange rate approached 17-week lows, while the Euro to Pound currency pair hit its softest level since February 2020. The Euro was pressured lower against the US Dollar after positive data came out across the pond; further data printing to the upside could further weigh on the EUR/USD exchange rate. It's also a quiet week for Eurozone data, with mainly German stats due for release, such as the final July inflation reading and ZEW surveys detailing sentiment. 

Stellar data  

While the week before last may have had a disappointing ending for the US Dollar, last week showed a strong close after a stellar Change in Non-Farm Payrolls data print. While forecasts suggested July would see an increase of 870K people entering the workforce, the actual stat printed above expectations at 943K. In other favourable news, the June figure was positively revised to reach 938K. The US Unemployment Rate sank from 5.9% to 5.4%, bypassing forecasts of 5.7%. Wednesday will see the latest inflation estimate for July released in the week ahead, while Friday will bring with it University of Michigan Sentiment data.

Rate hike ahead?

In the Trans-Tasman last week, the Reserve Bank of Australia announced it was making a downward adjustment to its bond-buying programme, which created pressure on the Pound to Australian Dollar exchange rate while the Aussie climbed against other currency majors. The change was a surprise to many who'd expected the central bank to adjust its approach after recent lockdown effects and corresponding economic data. Meanwhile, the New Zealand Dollar also had an uplift with strong gains towards the end of the week, as investors anticipated interest rate hikes in the near future. The Kiwi Dollar gained around 0.37% versus the US Dollar for the week, while the Aussie Dollar climbed by about 0.16%. Solid New Zealand labour market data has supported the Kiwi exchange rate, with investors eyeing the next RBNZ monetary policy meeting on August 18th. The central bank hasn't hiked rates since mid-2014 and cut rates to record lows of 0.25% last year as central banks worldwide reacted to the impact of Covid with emergency cuts. No central banks from developed countries have yet increased rates since the pandemic began, but the strength of New Zealand's economic resilience has raised expectations for a policy change. Westpac Senior Economist Satish Ranchhod said: 'Given the strength of economic activity and related lift in inflation pressures, we continue to expect that the RBNZ will hike the cash rate by 25bps at its August meeting, with follow up hikes in October and November.' 

In the week ahead, New Zealand card spending stats will be out, as well as Australia's Westpac Consumer Confidence Index. Additionally, New Zealand will release its services and business Purchasing Managers' Index data, while Australia will publish its latest Consumer Inflation Expectations stat.

Losing ground

Last week, the Canadian Dollar, one of 2021's best-performing major currencies, lost some ground after a disappointing employment figure reached markets. Data showed 94K jobs had been created in July, but while positive, it was a far cry below forecasts of 177.5K after the previous 230.7K in June. The Unemployment Rate reading failed to reach the 7.4% expectation too, but still recorded a drop from 7.8% to 7.5%. The next seven days is incredibly quiet for Canadian data, meaning the Loonie could be sensitive to developments elsewhere, as well as commodity price changes, such as oil.