One of the most anticipated pieces of data this week will be the inflation figures. CPI inflation increased from 0.4% in February to 2.5% in June. We expect it to move higher over the coming months. The Bank of England’s recent update forecast inflation moving up to around 4% at the end of the year. For this week, markets expect a small fall in inflation due to changes in the cycle of clothing discounts, but it is likely to remain above 2%. Inflation in the UK remains significantly lower than in the US, though this gap may well tighten towards the end of the year.
The labour market outlook has also changed recently. The end to the furlough scheme is not expected to lead to a big rise in unemployment any more. Rather, businesses have been struggling to fill vacancies which is resulting in pressure on wages. We expect to see a further rise in employment for June, likely to be in line with the previous reading. Unemployment is not expected to have moved much from 4.8%. The level of unfilled vacancies is likely to continue to rise, with many questioning how long and whether this will continue. Wages are also expected to have risen sharply though much of this will be due to distortions in the data as a result of the pandemic.
Last week saw UK GDP rise by 1.0% in June and 4.8% in the second quarter, led by consumer-facing services. By contrast, retail sales for July may show a fall in spending. The British Retail Consortium has suggested that July sales may have been reduced by poor weather and by consumers spending more on services as restrictions have been lifted. We expect to see a small fall in consumer confidence, following recent falls in business sentiment.
GBPEUR – 1.1747
GBPUSD – 1.3846
It has been a quiet couple of weeks of European data. Last week, the German ZEW survey showed future expectations about the economy dipping to a 9-month low in August. This reflects the increase in Covid cases and the potential for further disruption. The current conditions reading, in contrast moved up to a 32-month high. This week, there is the second estimate of second quarter GDP which is expected to confirm the initial reading, showing the Eurozone returning to growth. The Norges Bank will also provide a policy update, with a wait-and-see approach expected, in line with most major central banks.
EURUSD – 1.1787
EURGBP – 0.8513
The minutes of the Federal Reserve’s July policy meeting will be released on Wednesday. The post meeting comments hinted that tapering is getting closer, so the minutes will be watched for further details. Fed Chair Powell is scheduled to speak at an event, though he will probably not venture into any news areas on monetary policy. His speech at the Jackson Hole forum on 27th August may be more interesting as Fed chairs have used that to signal future changes in policy direction. Last week saw, annual CPI inflation stay at 5.4% for July, though the ‘core’ rate dropped back to 4.3% from 4.5%. This will no doubt remain the focus for the Federal Reserve.
This week, we have July updates for retail sales, industrial production and housing starts, which are expected to give mixed indications on the strength of activity in the US. Overall growth still seems to be buoyant but is slowing as activity returns to more normal levels. Supply constraints also appear to be an issue. We are seeing switches in spending as restriction are lifted. This is likely to lead to weakness in retail sales as consumers purchase more newly reopened services. In contrast, we are likely to see a further rise in industrial production.
GBPUSD – 1.3846
EURUSD – 1.1787
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*Interbank rates correct at 7 am on the date of publishing.