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GBP - Decisive week for UK data
Sterling begins the week on firmer footing, supported by a combination of resilient UK growth and a comparatively hawkish Bank of England stance. UK GDP expanded 0.4% quarter-on-quarter in Q2, with fixed investment providing the largest contribution, a composition that has reinforced the view that the economy retains underlying resilience.
The focus now turns firmly to domestic inflation and labour-market data. Tuesday's employment report is expected to show unemployment easing to 4.8% from 4.9%, while regular earnings growth is forecast to remain at 3.4%. The more consequential release follows on Wednesday, with July CPI expected at 2.9% year-on-year, up from 2.6% in June. The increase is largely attributable to the 13% rise in the Ofgem energy price cap.
A stronger-than-expected inflation print would reinforce the case for the Bank of England to maintain a restrictive policy stance, particularly given Chief Economist Huw Pill's recent comments that stronger Q2 growth strengthens the argument for higher borrowing costs. Friday's August flash PMIs then provide a final test, with the composite index expected to ease from 52.2 to around 51.5.
For corporate decision-makers with forthcoming Euro or Dollar requirements, the key point is that Sterling enters the week with several potential domestic catalysts behind it. Against the Euro, the €1.1750 area is the immediate level of interest, with a sustained move through there bringing the July high around €1.1810 into focus. Against the Dollar, GBP/USD is trading around $1.3550, with further direction likely to be determined by the relative path of UK and US interest-rate expectations.
Weekly Data:
Tuesday 18th August
7am - Claimant Count Change
Wednesday 19th August
7am - CPI y/y
Friday 21st August
9.30am - Flash Manufacturing PMI & Flash ServicesPMI
EUR - Euro momentum builds as the Dollar loses rate support
The Euro has extended its recovery for a third consecutive session, with EUR/USD reaching a two-month high and approaching the psychologically important $1.1600 level. The move reflects a broader deterioration in Dollar momentum rather than a single Euro-specific catalyst.
Eurozone inflation remains central to the currency's support. July headline inflation is estimated at 2.9%, above the ECB's 2% target, strengthening market expectations that the ECB could deliver a further 25bp rate increase in September.
That expectation will be tested by this week's data. The principal release is Friday's August flash PMI, with consensus looking for services to moderate to 51.0 from 51.7, manufacturing to 51.5 from 51.9 and the composite measure to 51.4 from 52.0. Those forecasts would represent slower growth rather than outright contraction. A material move back towards the 50 threshold, however, would challenge the current rate-hike narrative.
Markets will also monitor the ECB's negotiated wage indicator, household inflation expectations and public appearances from President Lagarde and Chief Economist Lane. European equities have also recently outperformed their US counterparts, providing a broader backdrop in which the previous US-exceptionalism trade has lost some of its currency support.
Technically, $1.1600 is now the principal near-term reference point. A sustained break above it would strengthen the Euro's medium-term recovery structure; failure to establish a foothold could prompt consolidation after the recent advance.
Weekly Data:
Friday 21st August
9am - Flash Manufacturing PMI & Flash Services PMI
USD - Softer US data continues to erode the Dollar's rate advantage
The Dollar remains under pressure following a sequence of softer US economic releases that has reduced expectations of an imminent Federal Reserve rate increase. July retail sales fell 0.6% month-on-month, the first decline in nine months and the largest monthly fall since May last year, signalling a meaningful moderation in consumer momentum.
The inflation picture has also become less supportive of immediate tightening. July PPI was unchanged month-on-month, while annual PPI eased to 4.7% from 5.5% in June. Combined with July's unexpected job losses and subdued consumer-price data, the releases have shifted market pricing materially.
Markets are currently assigning roughly a 30% probability of a September Fed rate hike, a significant reduction from the much higher expectations seen earlier in the summer. The result is a weaker Dollar and a more challenging backdrop for the traditional US-exceptionalism trade.
The immediate event risk is Wednesday's FOMC Minutes from the July meeting, when rates were held at 3.50%-3.75% and three policymakers favoured an increase. Markets will be looking for evidence of how durable that hawkish minority is and whether the Committee remains sufficiently concerned about inflation to justify another increase.
Friday's US flash PMIs, alongside housing and industrial-production data during the week, will provide further evidence on the underlying momentum of the US economy. For businesses with material Dollar exposures, the current environment argues for close attention to the interest-rate differential rather than assuming that previous Dollar strength will automatically reassert itself.
Weekly Data:
Wednesday 19th August
7pm - FOMC Meeting Minutes
Friday 21st August
2.45pm - Flash Manufacturing PMI & Flash Services PMI
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