The week ahead – more USD weakness?

The US – Europe inflation numbers are starting to diverge considerably and causing currencies to swing as market pricing adjusts to reflect changing interest-rate expectations. Last week saw EUR/USD and GBP/USD register the biggest weekly moves in over 1 year.

Another strong week for GBP saw GBP/USD jump from 1.2700 on Monday to 1.3100 this morning.

GBP/EUR was more stable, sitting in the middle of recent ranges at 1.1650 – red-hot inflation means more hikes are on the way in the UK despite the impact upon households and the housing market. Deloitte’s Quarterly Survey showed that UK firms are now ‘extremely cautious’ in the current economic environment.

 The US printed inflation numbers that were much softer than expected and the USD has weakened significantly over the past week. The market is not yet sure on the path of US rates, but some are now only expecting one more 0.25% hike this year – peaking around 5% - 5.25%. However, despite weakening inflation the labour market remains incredibly strong and some economists think that the Fed can afford to keep raising rates and cool the US economy.

Last week saw robust consumer sentiment and we will be looking at Tuesday’s Retail Sales data to give some more colour.

Euro strength has continued through last week and as the USD weakens, EUR/USD is pushing to 1.1200 (next resistance is expected at 1.1275) – the highest level since early 2022 and a long way from parity which we saw in late 2022. This is because the ECB remains committed to raising rates - ECB member Vasle continued the rhetoric this morning, saying that core inflation remains high and resilient. We have more ECB speakers, including President Lagarde throughout today.

Growth figures released showed a pace of 6.3% annually, which is strong, but below the expectation of 7.3%. June’s Retail Sales were also much weaker (3.1% growth vs 12.7% reported in May) – China’s below-par growth suggests a slight weakness in the underlying economy – something the markets will be closely monitoring.

Other news:

Main Events this week:

• Tuesday: US Retail Sales / Australia central bank minutes / Canada Consumer price index / New Zealand inflation data

• Wednesday: UK Inflation data

• Thursday:  AUD employment & confidence data

• Friday:  UK Retail Sales