The dollar ended last week firmly on the front foot, with cable moving back below the $1.39 level and EUR/USD dropping down to the $1.175 mark. This followed the release of a strong US employment report for July, with non-farm payrolls increasing by 943k relative to a forecast for an 875k rise. The data were viewed by the market as increasing the pressure on the Fed to begin tapering its asset purchase programme before year-end, given the central bank had previously guided that it was reluctant to do so given the incomplete nature of the labour market recovery. Today, we will hear from a couple of FOMC speakers and it will be interesting to see if their views on the timeline for tapering have changed given the latest data. Any signs of a hawkish shift could offer further support to the greenback.
Later this week, US CPI inflation figures for July will attract significant attention, with markets looking for any evidence of a slowdown in price growth. In June, inflation unexpectedly accelerated to 5.4% y-o-y on the back of major demand-supply supply imbalances that have driven prices higher in sectors sensitive to the re-opening (hospitality, transport, used cars & energy). Analysts forecast that prices pressures eased slightly in July, with the headline rate slowing to 5.3%. However, risks are arguably tilted to the upside given that the prices sub-component of the non-manufacturing ISM hit its second-highest level on record in July. Should inflation fail to subside or show any signs of broadening out into different sectors, the dollar may extend its gains.
Over in the UK, there is a quiet start to the week, with little out to influence sterling. This follows a strong week for the currency, which benefitted from the Bank of England’s hawkish shift last Thursday when the central bank acknowledged it is likely to tighten policy in the coming years in order to keep inflation close to 2%. Our bullish outlook on sterling had been based on the expectation that the BoE would tighten monetary policy before peers, and last week’s meeting reinforced this view.
Data-wise, the first estimate of UK GDP for Q2 is the highlight, but given the lagging nature of the figures, they are not typically a mover for sterling. We are expecting to see a strong increase in output growth in the quarter, driven by consumer spending as the UK’s rapid vaccine rollout allowed for the economy to re-open and paved the way for the release of pent-up demand. As elsewhere, we anticipate that the recovery was likely held back somewhat by supply chain disruptions and the early drag from the ‘pingdemic’ that emerged as a headwind at the end of the quarter and saw activity ease markedly in July. The positive, however, is that UK Covid-19 cases have continued to subside and the final restrictions on activity were removed on July 19, which should see growth pick-up somewhat in August.
In the eurozone, there is a very quiet macro schedule both today and over the course of the week, which could see the euro struggle for direction. In line with our expectations, we are beginning to see the single market currency come under some downward pressure as differences between the ECB’s and the BoE/Fed’s policy stances have become evident, with GBP/EUR pushing year-to-date highs near €1.18.
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