ECB announces decision on Thursday & the UK is packed with data releases this week
A week of back-and-forth strikes between the US and Iran has expanded beyond strictly military targets to include bridges, utilities, and port facilities, raising fears of a prolonged conflict in the Middle East. There were fears that this could weigh on riskier assets, such as the British Pound, against the USD in the near term. However, GBP remains robust, trading around 1.3450 vs USD and maintaining very high levels vs EURO at 1.1775
GBP: Expected to remain volatile as a slew of UK economic data is scheduled to be published. In the data-pack week, investors will pay close attention to the employment data on Tuesday, Consumer Price Index data on Wednesday, and Retail Sales and Purchasing Managers’ Index (PMI) data on Friday. The impact of employment and inflation is expected to be significant on market expectations for the Bank of England’s monetary policy announcement next week.
On Tuesday, the ONS may publish ILO Unemployment data showing that unemployment remained steady at 4.9%. Average Earnings Excluding Bonuses, a key measure of wage growth, is expected to have grown steadily by 3.4% - a much needed boost for the UK economy if so.
The UK core CPI – which excludes volatile components of food, energy, alcohol and tobacco – is estimated to have grown at a moderate pace of 2.5% against the previous reading of 2.6%.
Signs of inflationary pressures cooling down are likely to boost expectations of a rate cut in the UK, but GBP is rallying in the short term until the data becomes clearer / concrete.
USD: Signs of softer US consumer and producer inflation have dampened the US Federal Reserve rate-hike bets, which is likely to be the reason that the USD remains weak in the short-term. The chance for a Fed rate hike in July stood at 14%, versus a 25% implied pricing last week, according to the CME. Traders are pricing in 0.3% of hikes by December which should make the USD stronger in the medium term.
EUR: Attention now turns to the European Central Bank (ECB) policy meeting on Thursday. Markets widely expect the central bank to leave rates unchanged this week after delivering a 0.25% increase at its previous meeting. Investors will closely monitor the monetary policy statement and comments from ECB President for fresh clues on the future path of interest rates.
EUR also remains under pressure from escalating tensions between Israel / US & Iran, which continue to support higher Oil prices and weigh on the Eurozone's economic outlook. Against this backdrop, markets are also expected to look for any indication from the ECB regarding the possibility of another rate hike at the September meeting.
EUR/USD around 1.1400 is looking for direction.