Pound Needs BOE’s Support to Push Higher

GBP

The pound had a volatile time last week with both positive and negatives driving the currency up and down. On Thursday, the Bank of England Governor Andrew Baily made a speech where he warned overreacting to “temporary” inflationary pressures, prompting some re-pricing in tightening expectations and sell off in Sterling. On the positive side, Friday saw the EU grant a delay to the chilled meat ban in Northern Ireland, which gave the pound a boost and calmed market’s concerns about a potential trade war. Though, like most issues between the EU and UK, this has only delayed a solution and shows the strong political divergences that persist. Data wise, GDP was worse than expected at -1.6% for Q1 and Markit Manufacturing PMI for June just missed the consensus at 63.9.

The pound should be in for a positive week and has managed to hold up against the recent dollar strength far better than its G10 counterparts. The Delta variant continues to push up Covid case numbers in the UK but with hospitalisations and deaths still low, it isn’t having an effect on the markets. Though, if the UK government decide to push back the reopening further, then markets will likely change their mind on sterling. The key event this week will be another speech from Andrew Bailey, as markets have become extremely sensitive to his comments excepting him to be hawkish and becoming disappointed when he’s not.

USD

The dollar ended the week with a strong Non-farm payrolls number and was yet again the top performing G10 currency last week. Though the unemployment rate was higher than expected, progress in jobs gains will be welcomed by the Federal Reserve and likely to keep US money market rates biased towards a 2022 rate hike. The greenback also continues to win the favour of traders carrying on carry trades and using the dollar as the low yield currency.

The US starts off the week with a bank holiday due to 4th of July over the weekend. This will likely mean a slow start for the dollar due to the reduced liquidity in the markets. The main driver for the dollar this week will be the FOMC minutes released on Wednesday evening. Markets will be watching to see how the doves and hawks are arguing their cases, especially the seven members casting their Dots for the first-rate hike in 2022. Data wise, Tuesday will see the release of ISM Services PMI for June expected at 63.5.

EUR

The euro struggled last week, especially against a strong dollar and was one of the worst performing G10 currencies. The ECB’s ultra-dovish stance is hurting the euro due to the ever hawkish tone of other central banks around the world, most notably the Fed. This is why inflation data was watched so closely last week as markets anticipated when the ECB will make their move. Though the data hit the consensuses of 1.9% just below the 2% inflation target for the central bank, they are unlikely to change their policy anytime soon.

This week the data calendar is extremely light for Europe, meaning the single currency is likely to be more reactive rather than making any moves off its own back. Angela Merkel is in London on Monday meeting Boris Johnson, so there is potential for headlines around the UK/EU, though it will likely be around travel between the two countries for those who have been double vaccinated.