Highlights from last week:
- Pound subdued as Brexit turmoil continues
- Rising US inflation adds to hopes of further rate hikes
- German inflation eases pressure on ECB
The week ahead:
- US industrial production data (Tuesday, 2.15pm)
- UK consumer inflation data (Wednesday, 9.30am)
- Euro zone consumer inflation data (Wednesday, 10.00am)
Sterling struggles amid ongoing Brexit woes
Continued uncertainty surrounding Brexit negotiations saw the pound retreat against the US dollar and remain flat versus the euro last week.
Resignations from both Boris Johnson and David Davis weighed on sterling after both confirmed they had no confidence in Theresa May’s formalised Brexit proposals. This meant the prime minister was forced to reshuffle her cabinet last week.
Varied economic data failed to offer sterling much by way of support. Industrial production during May fell by 0.4%, whilst construction output rose by 2.9% in the same month. Elsewhere, the Office for National Statistics’ latest economic growth report revealed an upgrade to UK growth in the three months to May.
US dollar firmer as inflation spikes
The US dollar made gains against both the pound and euro last week as higher consumer inflation gave rise to speculation that the Federal Reserve will continue on its path to hiking interest rates this year.
Higher costs for fuel, car insurance and rent meant consumer prices rose by an annualised 2.9%, its fastest pace in over six years. The Federal Reserve’s inflation target sits at 2% and the latest figures affirmed hopes of a further two interest rate rises this year as the central bank attempts to stave off spiralling prices without denting economic growth.
A telephone deal of £10,000 at midday on Friday would have purchased US$12,964 through our telephone Currency Service.
Euro wobbles as German inflation underwhelms
Disappointing German inflation left the euro struggling last week, giving rise to speculation that consumer prices across the euro zone could also be slowing.
Germany’s annualised inflation rate came in at 2.1% in June, down from 2.2% in May. Focus will now turn to Wednesday’s release of consumer inflation for the euro zone as a whole for June. If prices dip closer to the European Central Bank’s target of just below 2%, it’ll relieve pressure on the central bank to wind up its current stimulus measures sooner than expected.
Elsewhere, the European Commission revised down its current 2018 growth forecast from 2.3% to 2.1%.
The Canadian dollar finished the week in negative territory versus sterling even after the Bank of Canada (BoC) raised interest rates for the second time this year. The central bank hiked rates to 1.5% in its latest policy meeting on Wednesday. The move was largely expected as the BoC struggles to stave off rising inflation, which now stands at seven year highs.
Despite recovering somewhat on Friday the Japanese yen ended the week lagging behind the pound after the country’s industrial production output disappointed in May. Figures revealed production increased 4.2%, less than the 6% economists had expected.
The week ahead
Aside from ongoing Brexit developments, the UK data calendar has several important releases this week. These include the latest monthly labour market figures (Tuesday, 9.30am), consumer price inflation data (Wednesday, 9.30am) and retail sales data (Thursday, 9.30am). Recent signs of a rebound in the UK economy after a weak first-quarter have lifted expectations that the Bank of England might soon raise interest rates, so the pound could find support if this week’s data boosts the case for interest rates to be nudged higher at next month’s monetary policy meeting.
Ongoing trade tensions between the US and China could play a key role in the US dollar’s performance this week. Headlining the US domestic calendar will be Tuesday’s release of US industrial and manufacturing production figures (2.15pm).
The European Central Bank has confirmed that it will scale back its quantitative easing stimulus measures later this year amid recent evidence of rising euro zone inflation pressures. Accordingly, the latest set of euro zone consumer price inflation data (Wednesday, 10.00am) will be a key focus for the euro this week.