Markets Watching Inflation Closely

GBP

The pound had a mixed week increasing against the euro by 0.4% but decreasing by 0.2% against the dollar. On Thursday the pound had its strongest one-day gain against the euro since July, this came off the back of comments from Bank of England Governor Andrew Bailey that BoE policymakers are actively and openly working on the assumption that the bank will need to raise interest rates next year and again in 2023. With inflation increasing sharply, interest rates are expected to increase above their pre-covid levels. On the data front GDP missed expectations at 0.1% versus 0.6% but industrial production performed strongly at 1.2%.

The pound has a busy economic calendar this week and with the next Bank of England meeting approaching on the 23rd of September the pound’s sensitivity to the data is set to increase. The first main data release comes on Tuesday with the job report with unemployment expected to decrease from 4.7% to 4.6%. On Wednesday CPI is released expected at 2.9% which is a significant increase compared to the previous reading of 2%. This would be well above the Bank of England’s target and should give the pound a boost.

USD

The dollar was the best performing G10 currency last we as markets returned to safe haven trades as the delta variant once again looked to hinder global growth. The dollar also got a second boost as investors start to price in the tightening of monetary policy from the Fed. US-China relations were back in the headlines last week as Joe Biden and President XI spoke for the first time since February. Joe Biden’s arrival in the White House was meant to unwind Donald Trump’s trade war and potentially find a way for constructive dialogue but this has not been the case. This will likely be a key driver for the dollar going into the new year.

The dollar has had a good start to the week which can be attributed to the US Government outlining how they are planning to pay for their infrastructure bill. With reports suggesting they plan to raise corporation tax to 26.5% from 21% and capital gains tax to 25% from 20%. These are lower than then markets originally expected. The Fed enter their black out period this week before the next meeting on the 22nd of September. On the data front, CPI is released on Wednesday expected at 5.3% year on year and 0.3% month on month. Retail sales are released on Thursday expected at -0.7% which would be an improvement from the previous reading of -1.1%. The weeks ends with Michigan Consumer Sentiment Index for September expected at 70.2.

EUR

The main event for the euro last week was the ECB meeting which marked a small win for hawks. Policymakers finally caught up with reality and modestly reduced the pace of asset purchases. That was, however, largely priced in by the market and the EUR failed to see any material benefit. This is because the ECB remains extremely dovish overall and their will need to be some dramatic changes overall in order for Christine Lagarde and her team to tighten interest rates. Data wise, GDP for the eurozone beat expectations at 14.3% versus the consensus of 13.6%.

The euro is in for a quiet week with a very light economic calendar. The only data of note comes on Friday with CPI expected at 1.6% which would match the previous reading. There are a couple of ECB speakers this week with Schabel speaking on Monday and Lane on Wednesday. Both are Doves and are expected to cause the euro some weakness as they speak on the “recalibration” of PEPP announced last week.