This week the Bank of England will provide an update though no change in policy is expected. There may well be debate over the QE programme. Recent speeches have highlighted concerns about the recent inflation rises. We may see one or two votes to reduce the existing £150bn tranche of asset purchases.
The Monetary Policy Report will also provide updated forecasts including a much higher peak in inflation, well above 3% later this year. Most in the Bank of England still assume that the rise will be ‘transitory’. The medium-term projections are still likely to show inflation easing back to the 2% target in 2 and 3 years’ time. The committee are likely to adopt a similar wait-and-see approach to the Federal Reserve on this basis. They may also provide some guidance on the bank strategy for when rates will change.
Aside from the Bank of England updates, there will be July PMI readings. The manufacturing and services are second readings, although the July construction PMI will be new data. They are all expected to moderate slightly from very high levels, but will still suggest strong growth over the next months.
GBPEUR – 1.1715
GBPUSD – 1.3908
The positive data from Europe continued last week with GDP for the Eurozone rising by 2% in the second quarter. This is the first increase in three quarters, and comes as we see the expected rebound from the Covid disruption. On the back of this, we also saw Eurozone business confidence post a record high in July. Eurozone inflation was higher than expected in June at 2.2%, with further increases likely to draw the attention of the ECB.
The data continues to look positive going forward, with updates on Eurozone PMI manufacturing and services this week, followed by retail sales. The PMI numbers are expected to remain at elevated levels, around 60, reflecting that strong growth is expected to continue.
EURUSD – 1.1872
EURGBP – 0.8536
As expected, there was little news from last week’s Federal Reserve monetary policy update. The Fed noted some progress in the economy. That may be a hint that asset purchase tapering may not be far away. Fed Chair Powell did not provide any timetable for a change. In fact, most policymakers seem more concerned about downside economic risks than a “transitory” inflation rise. Fed Chair Powell noted that a further fall in unemployment would help decide when to phase out their asset purchases.
The monthly US employment report this week will be closely watched. We expect the July report to show a monthly jobs rise of 935,000k which would be the largest for almost a year. The unemployment rate is also likely to fall back to 5.7%. There is an unusual combination at the moment of many job vacancies alongside elevated unemployment. The wage data will therefore be scrutinised for signs that they are increasing due to recruitment difficulties.
In a busy data week, we will also see the ISM manufacturing and services reports. Both slipped in June, though they remain at levels suggesting strong growth. The US GDP figures for the second quarter were lower than expected at 6.5%, though inflation rose further, by 4% in June.
GBPUSD – 1.3908
EURUSD – 1.1872
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*Interbank rates correct at 7 am on the date of publishing.