The June CPI report will be closely watched this week. It is expected to show inflation falling to 8.3%. This would be a welcome fall from 8.7% in May, mainly due to a fall in energy prices. On the flip side, core inflation will be more of a worry and may rise again for the third time in a row to 7.2%. This is likely to add to expectations that interest rates will have to continue to rise. There are several Bank of England policymakers due to speak this week.
Following the latest labour market report last week, which showed regular pay growth rising by 7.3%, we had further detail on public sector pay awards. The news that the government will offer awards of between 5% to 7% will put further pressure on this figure and inflation overall. The potential for this inflation to become entrenched will remain a worry for the Bank of England. Inflation remains considerably higher in the UK than in the US or Europe.
This week, retail sales and the GfK consumer confidence measure will give an indication of consumer behaviour. Retail Sales are likely to be up slightly (0.5%), though they remain lower overall than a year ago. Consumer confidence may well fall after a solid run of increases as higher inflation and rate hikes worry consumers. Overall GDP fell by only 0.1% in May with the extra Bank Holiday being offset by fewer strikes.
GBPEUR – 1.1634
GBPUSD – 1.3089
It is a relatively quiet week in Europe, though there are several European Central Bank policymakers scheduled to speak. There does not seem to be much forthcoming to offer any new guidance ahead of the 3rd August decision. Markets very much expect a further rate hike.
This week, we will see whether the final June inflation rate drops to 5.5% from the May reading of 6.1%. Although not as low as US inflation, European inflation is falling much faster than in the UK, which may take some pressure off policymakers, particularly as signs grow of slowing economic activity. Business confidence and manufacturing and services PMIs this week are expected to show activity weakening further.
EURUSD – 1.1250
EURGBP – 0.8595
Last week, we saw an increase in optimism in the US with lower inflation than expected. This provided a boost on the basis that interest rates may be close to a peak. As a result, equities and bond markets moved higher, with hopes that easing inflationary pressures increase the chance that recession can be avoided.
With inflation falling to 3% from 4% in May, treasury yields fell back to levels from the start of June. Even the core rate dropped back to 4.8% from 5.3%, which will give the Fed comfort. As a result, the dollar depreciated to its lowest levels since last spring. US interest rates are likely to be cut much more quickly than the UK or Europe. The hike on 26th July is still highly likely though any further hikes in the autumn are far less likely now.
This week, we will see June retail sales, industrial production, housing starts, and existing home sales. So far this year, the economy continues to grow steadily and we expect the second quarter data to show a similar picture, with retail sales expected to remain robust. Even the housing data which has been weaker given higher interest rates may start to look more positive this week.
GBPUSD – 1.3089
EURUSD – 1.1250
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*Interbank rates are correct at 7am on the date of publishing.