The dollar came under some relatively heavy selling pressure on Friday afternoon, with GBP/USD bouncing up to $1.385 and EUR/USD pushing toward $1.18 as the University of Michigan’s consumer sentiment index dropped to its lowest level since 2011 in August. The size of the fall took markets by surprise, with the data suggesting that a sharp pick-up in US Covid cases, and to a lesser extent the recent surge in inflation, may pose more downside to consumer spending in Q3 than had been previously thought. While it is only one print, evidence of a marked slowdown in household expenditure will have negative implications for US growth given that it had been expected to drive the recovery. This, combined with the fact that we saw a modest easing in US CPI inflation in July, has arguably reduced the risk that the Fed will announce that it will commence tapering its QE programme before the end of the current quarter.
In terms of the week ahead, after a quiet start today, we will get a couple of updates from the Fed. Of particular interest will be a speech by Fed Chair Powell tomorrow, though we anticipate that he will keep his cards close to his chest and is unlikely to signal a major shift in policy stance ahead of his keynote speech at Jackson Hole next week. On the data front, retail sales and industrial productions figures for July are due, though they have been overtaken by the epidemiological situation and as such may not attract as much attention in FX markets.
There is a busy data schedule ahead in the UK this week, though it may take some significant positive surprises for GBP/EUR to take another look at last week’s highs near the €1.1830 mark. Attention will largely focus on the CPI figures for July due on Wednesday, with consensus anticipating another solid uptick in price growth (headline: +0.3% m-o-m) as demand and supply imbalances persist. However, this would see the y-o-y rate ease to 2.3% from 2.5%, reflecting base effects associated with the re-opening of the UK economy last July. The Bank of England has already indicated that it is anticipating a sharp uptick in price pressures in the coming months (4.0% by end-year), raising the bar that inflation must rise to before it moves the dial on the timeline for policy tightening. As it stands, we anticipate the hiking cycle will begin with a 15bps increase in the Bank Rate (to 0.25%) in Q322.
The release of employment data for Q2 will also be of interest this week, with the jobless rate projected to have dipped to 4.7%. Our focus will be on the timelier aspect of the report, namely the July payrolls and vacancies numbers. In June, the former came in just 210k (or 0.7%) below pre-pandemic levels, while the latter showed that job openings were at a record high. The narrative surrounding the UK labor market has changed markedly since Q121, with the focus now on worker shortages rather than the prospect of a sharp spike in unemployment following the end of the Job Retention Scheme in September. To be fair, 1.9mn were still furloughed at the end of June per the latest official release, but timelier survey figures suggest that this had fallen to just 1mn by early August.
Over in the eurozone, there is nothing due of any note this week. As a result the action in the single market currency will be largely driven by the other half of its main pairs.
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