The pound has been on the back foot over the last week, following some weaker data. Against the US dollar, there has also been demand for the US currency as a safe haven. The fall in inflation back to the 2% target level was not entirely unexpected and will likely be short-lived. Inflation is expected to resume its trend higher in August.
Retail sales also fell by 2.5% in July, with a combination of the reduction of purchasing following the Euro championship, along with poor weather. Some of this weakness also reflects a switch to services spending as restrictions eased. The signs are that the UK labour market remains strong, as the unemployment rate fell to 4.7%. Meanwhile, unfilled vacancies reached a record high of nearly a million in the latest period.
The flash PMIs this week are expected to show continued strong activity. Manufacturing and services PMIs fell back in July to 60.4 and 59.6, respectively. For August, we expect both indices to rise slightly, whilst still indicating strong growth. Overall, these figures suggest some moderation in economic growth after the strong rebound in the second quarter.
GBPEUR – 1.1653
GBPUSD – 1.3654
The focus this week will be the August ‘flash’ PMI surveys. Last month, the manufacturing PMI was very strong at 62.8 reflecting solid output and orders. The services PMI was the strongest since 2006 at 59.8. This was boosted by tourism, travel and hospitality. We expect a slight fall from these very strong levels to 62.1 for manufacturing and 59.6 for services. The German IFO business survey is likely to ease for a second month to 100.4 in August. The expectations component will likely show concerns around supply constraints and new Covid variants.
The ECB will also publish the ‘account’ of its July policy meeting. There were no policy changes, but the meeting was the first with the new 2% symmetric inflation target. This allows for some tolerance above that target. The main change in the July meeting was the raising of the bar for when interest rates may increase. Inflation will need to be 2% “well ahead” of and durably for the rest of the projection horizon. The minutes may give more insight on whether more policy stimulus may be required.
EURUSD – 1.1717
EURGBP – 0.8581
We saw a slump in US consumer sentiment to a decade low. This was followed by weak July retail sales data, which suggests US consumer spending may be slowing by more than expected. Industrial production was, however, stronger than expected and weekly initial jobless claims continued to fall.
The markets remain focused on when the Federal Reserve is likely to start tapering the central bank’s asset purchases. The minutes and comments from Fed officials last week suggest that an announcement may be made at the next policy update in September. This will be finely balanced and we may hear more from Fed Chair Powell at the Kansas City Fed’s Jackson Hole symposium. This is an annual gathering of central bankers and others.
This week, we will also see July personal spending figures. US retail sales data fell in July, but the question is whether it signals a broad weakening of consumer spending. Many think it is a shift in spending from goods to services as the economy reopens. We expect personal spending to have risen by 0.4% in July, which would be a fall from 1.0% in June. The PCE deflator, the Fed’s preferred inflation measure, is likely to move up to 4.2% from 4.0%.
GBPUSD – 1.3654
EURUSD – 1.1717
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*Interbank rates correct at 7 am on the date of publishing.