RedFX Snap: UK to increase rates & US employment ahead

Last week saw the US and the ECB increase rates and the UK is set to do the same this week. In contrast overnight, the Australian central bank ‘paused’ its hiking cycle, leaving rates at 4.1% and saying future decisions will be data-dependent – the currency fell 1% vs USD on the news. This shows the complexity that central banks are facing when making policy decisions – all of which will feed into the currency markets.

GBP/USD has pulled back from the recent 1.3100 high, steady at 1.2825 ahead of Thursday’s Bank of England decision. GBP/EUR has drifted higher but remains in the recent range at 1.1650.

Thursday will likely see another 0.25% interest rate hike which will underpin GBP strength. The Press Conference will be closely monitored for signs of a slowdown in rate increases. If Governor Bailey suggests that they will be slowing down, then GBP will come under pressure – every word will be watched.

 USA: Friday’s employment data is the key print this week. The employment numbers have consistently beaten expectations which shows a resilience in the US economy alongside slowing inflation (the Federal Reserve's preferred measure of inflation, the Core PCE Price Index, came in at 4.1% annually, down from 4.6% in May and below market expectations of 4.2%).

EUR: After the rate hike last week (to 4.25%), the Euro has weakened vs USD, with EUR/USD falling from 1.1125 on Friday to 1.0975 today. The statement that was released alongside the rate announcement showed the ECB is now taking a neutral stance on rates, with an ‘open-mind’ going into September’s meeting.

China: Caixin data released overnight showed a contraction in the manufacturing sector in China which is consistent with the slew of weaker data that we have seen recently. As China slows down the Politburo has also stated that it will give support to the property sector which has been suffering both in terms of residential property and developers weakening finances.

 Main Events this week:

• Tuesday: US manufacturing data / NZD employment

• Wednesday: USA 2nd tier employment data

• Thursday: UK interest rate decision & press conf. / China Services data / US Services data

• Friday:  USA employment data / EU Retail Sales / CAD unemployment