There is a raft of significant data next week starting with EU Gross Domestic Product numbers on Tuesday that will show how strong the economic recovery has fared in the second quarter.
The pound has rallied higher this week with levels for GBP EUR still holding on to an 18-month high. Sterling has been further supported this morning after UK Gross Domestic Product numbers released this morning showed the economy grew by 4.8% in the second quarter. In June the economy grew faster than expected by 1% which is the fifth month of consecutive growth, which bodes well for the recovery to continue.
As the FT reports, one minister has said “There are two schools of thought. One is that you’re a 400lb man and you should lose some weight; the other is that you’re a 400lb man and one more burger won’t hurt.” Rishi Sunak is reportedly concerned about rising inflation and the prospect of rising interest rates which would add to the cost of servicing the £2.2 trillion of UK debt, not seen this high since the 1960’s.
Expect the usual political uncertainty when MP’s return from their summer break in a couple of weeks’ time. There are currently growing tensions between the Prime Minister at No 10 and the Chancellor at No 11 Downing Street, over how to strike the correct balance between bouncing back from Covid and rising inflation and debt.
Expect the usual political uncertainty when MP’s return from their summer break in a couple of weeks’ time. There are currently growing tensions between the Prime Minister at No 10 and the Chancellor at No 11 Downing Street, over how to strike the correct balance between bouncing back from Covid and rising inflation and debt.
These developments are important for the price of sterling after the Bank of England last week revised its inflation forecast to peak at 4% in the fourth quarter, considerably higher than the 2.4% it had forecast in May. The strong revision has helped lend support to the pound as the markets realign expectations of when the Bank of England will ultimately raise interest rates.
With little in the way of UK economic data to end the week, focus moves to unemployment data next Tuesday.
HOW STRONG HAS THE EU’S ECONOMIC RECOVERY BEEN IN THE SECOND QUARTER?
EU economic data is limited as we end the week with just Industrial Production data released this morning. There is a raft of significant data next week starting with EU Gross Domestic Product numbers on Tuesday. The data will show how strong the economic recovery has fared in the second quarter.
EU Consumer Price Index inflation numbers are released next Wednesday. European inflation has also been climbing as it has in both the UK and US with the numbers breaking through the ECB’s target of 2%. Any further increase above its July reading of 2.2% could see significant market movement for the Euro. It is worth highlighting that inflation data in the UK and US has created significant volatility for both the pound and the dollar on the back of these releases. Any further uptick at a time when growth is already rebounding could see the Euro rally higher next week. The issue of inflation is now becoming extremely topical in the EU. Bundesbank President Jens Weidmann has stated that the European Central Bank would have to tighten policy if inflation rises. He went further when he said the ECB will not be able to protect governments from higher borrowing costs should inflation spike.
USD INFLATION ON THE RISE
The US dollar saw some volatility following US Consumer Price Index inflation data released yesterday giving some mixed signals. US inflation rose to 5.4% in July over the year although there was some softening in the monthly data which rose just 0.5% in July compared to the 0.9% seen the month prior.
The data is being closely monitored by policy makers at this time when there is an ongoing conversation about how much support the US economy really requires. Whilst the labour market has taken more time to return to normality, economic growth has now rebounded back to pre-pandemic levels for the first time whilst inflation has also rocketed higher to an alarming 5.4%.
The US economy is also performing well in other areas highlighting an economic rebound. US non-farm payrolls last Friday arrived better than forecast with the US labour market adding 943,000 jobs in July whilst unemployment also fell to 5.4%. To put things into perspective the numbers are as strong as in August 2020. With a large percentage of the US population vaccinated it bodes well for continued economic performance going forward. Those with dollar requirements would be wise to continue to keep a close eye on these important data releases as they continue to create volatility for the dollar.
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