Highlights from last week:
- UK inflation holds steady at 2.6% in July
- Euro zone economic growth upgraded
- Sterling slips to one-month lows versus US dollar
The week ahead:
- Canadian retail sales data (Tuesday, 1.30pm)
- Euro zone PMI activity data (Wednesday, 9.00am)
- UK second-quarter GDP data (Thursday, 9.30am)
Pressure on the pound intensifies
Sterling retreated below €1.10 against the euro again after last week’s UK inflation data missed market forecasts. The inflation rate kept steady at 2.6% in July, disappointing expectations for an uptick to 2.7% and reinforcing belief that the Bank of England remains unlikely to sanction an interest rate rise in the near term.
The UK’s labour market offered the pound a brief respite after figures revealed the rate of unemployment fell to its lowest level since 1975. The number of unemployed fell by 57,000 during the second quarter of 2017, helping the jobless rate dip from 4.5% to 4.4%. Whilst average weekly earnings rose at an annual rate of 2.1%, the squeeze on real pay growth continues as earnings fail to keep pace with inflation. Retail sales increased in July, led by strong food sales compared with June which offset falls in spending on other goods.
Euro supported on growth upgrade
Further evidence that the euro zone recovery is gaining momentum underpinned support for the euro. The region’s Gross Domestic Product (GDP) grew by 0.6% in the second quarter, with the annual growth rate upgraded from 2.1% to 2.2%. Signs of a strengthening recovery may soon help prompt a rethink from European Central Bank policymakers on how much monetary support is still required after years of extraordinary stimulus measures.
Dollar advances to one-month highs versus sterling
The sterling/US dollar rate dropped to one-month lows under $1.29 on Friday. The dollar had lost only limited ground after the minutes of the latest US Fed policy meeting pointed to a growing divisions amongst policymakers. Some noted “concern about the recent decline in inflation” and thought the central bank “could afford to be patient” in deciding when to raise interest rates, whilst others highlighted continuing strength in the employment market. Overall, there was therefore no clear steer on whether or not a further interest rate rise would be forthcoming later in the year.
Sterling struggles again elsewhere
The Australian dollar’s reaction to the Reserve Bank of Australia’s latest policy meeting was limited, with the pound trading above AU$1.65 for brief spells early in the week. Policymakers noted that the domestic outlook remained relatively unchanged, supported by improved business conditions and stronger non-mining business investment. Sterling went on to trade at four-month lows under AU$1.62 on Thursday.
The Swedish krona advanced to its highest level since late 2013 against sterling. The krona surged after Tuesday’s inflation figures showed local inflation running above the central bank’s target for the first time in nearly six years. Consumer prices rose at an annual rate of 2.2% in July, comfortably ahead of analyst forecasts, potentially paving the way for policymakers to bring a sooner than previously expected conclusion to the existing stimulus policies.
The South African rand gained to levels under ZAR17.00 to the pound for the first time in August. Easing political concerns meant the rand was able to take advantage of encouraging local data, with South African retail sales posting an impressive 2.1% rise over the second quarter.
The Japanese yen’s status as a perceived safe haven boosted some appetite for the currency earlier in the month amid rising tensions between the US and North Korea. Sterling’s losses against the yen accelerated in the latter part of last week to trade under JPY140 on Friday. On the data front, Japan’s economy grew at its fastest rate for more than two years during the second quarter.
The week ahead
On the domestic data front this week, Thursday’s release of the second estimate of second-quarter GDP data will be the highlight of an otherwise quiet UK economic calendar.
On the global stage, the gathering of central bankers from around the world at the annual Jackson Hole symposium (taking place over Thursday and Friday) will be closely watched for clues over global central banks’ monetary policies going forward. The US schedule is also fairly eventful and in aggregate the data will add some more colour to the overall economic picture. Releases include manufacturing PMI activity data (Wednesday, 2.45pm), new home sales figures (Wednesday, 3.00pm), existing home sales figures (Thursday, 3.00pm) and durable goods orders (Friday, 1.30pm).
Euro zone economic sentiment data (Tuesday, 10.00am) and preliminary PMI activity data (Wednesday, 9.00am) will be assessed for signs that the region’s economic recovery continued to broaden into August.
Other key data releases:
Canadian retail sales data (Tuesday, 1.30pm)
New Zealand international trade data (Wednesday, 11.45pm)
Swiss industrial production data (Thursday, 8.15am)
Japanese consumer price inflation data (Friday, 12.30am)