All Eyes on the ECB


The pound finished the week down against both the dollar and euro despite the change in tone from the Bank of England and better than expected CPI figures. Two speeches last week from Monetary Policy Members Ramsden and Saunders were more hawkish than the markets expected, and sterling rallied off the back of it, but those gains failed to stick. The Bank of England also come under fire from parliament about its “addiction to quantitative easing” which they call a “serious danger to the long-term health of the public finances”. CPI beat expectation of 2.2% at 2.5% on Wednesday and way above the BOE target of 2%, again adding pressure on the bank to increase its rates.

The UK starts this week with “Freedom Day”, though the UK government have come under fire from international scientists given the continued increase of cases and hospitalisations. For the pound to make and hold gains versus both the dollar and the euro, it will need to see a real shift in terms of policy from the Bank of England in order to follow suit like the Fed. The banks next meeting is on the 5th of August and the anticipation is mounting for it. The global FX trend has moved away from Covid cases and vaccines, and back to central bank’s monetary policy.


The dollar was the second best performing G10 currency last week with only the Japanese Yen being slightly stronger. Like the UK, US CPI surprised the markets when released at 0.9% versus a consensus of 0.4% for the month on month reading. This was the highest level since 2008 and gave markets further belief that the Fed are likely to change interest rates sooner than originally planned and helped strengthen the dollar. Though, Fed Chair Powell stuck to his mantra of caution in his testimony on Wednesday and pointed out that it is too early to start thinking about imminent tightening and that any reduction in QE purchases is still way off.

The dollar has a quiet week in terms of data, meaning that the currency is likely to be reactive, especially to the euro and ECB rate decision on Thursday. Though the dollar has been the second best performing G10 currency, questions are still being asked about Fed policy and the risk of inflation, which could lead to serious dollar weakness. But, if investors start to leave risky equities and look for a safe haven, then the dollar will be one of the first places they look.


The euro fell by half a percent versus the dollar last week, as it continues its losing streak since the middle of May. Against the pound, the euro saw a three- and half-month low as the markets reacted to the strong CPI figures out of the UK. But, strong profit taking on Friday saw the single currency take back some ground before the weekend. Data wise, Harmonized Index of Consumer Prices for Germany were released as expected at 2.1%. CPI also hit expectations exactly at 0.3% and 0.9% for month on month and year on year, respectively.

The ECB meeting on Thursday is the main event in the FX calendar this week. What was expected to be a non-event but has turned into the key focus after the ECB’s strategic review. This is where they change their inflation target from “below, but close to 2%’ to ‘2%’. This implies an even more dovish stance from the ECB and markets are waiting for some more comments from Christine Lagarde in the post decision press conference. Other data of note this week will be Germany’s Markit Manufacturing PMI for July expected at 64.1 as well as the Eurozone’s Markit PMI Composite expected at 60.

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