It was a quiet week on the data front, but that hasn’t stopped it from being another tough week for the British pound. A lack of positive data has left markets free to simmer on existing themes, which has not been constructive. Sentiment has weighed heavily on the currency as expectations for domestic economic softness grows following last week’s Bank of England (BoE) alarm bells. Against the Greenback, GBP dredged 1-month lows this week, the pair testing the waters below 1.30. Should buying interest for sterling remain subdued, the pair could slide towards post-referendum lows of 1.2800.
Performance against the euro has been equally disappointing this week for the British pound. GBPEUR plunged back to its post-Brexit/ 27-month lows this week as soft GBP sentiment was compounded by stronger than expected German Q2’16 GDP results. Prior to and in the immediate aftermath of Brexit an argument had been made that sterling’s losses against the euro would be tempered due to the contagion risk. That has not been the case thus far as recent data suggests that the greatest economic impact of Brexit remains for the moment contained to the United Kingdom. Anecdotally it feels like currency markets are waiting for the UK to trigger Article 50 before turning against the euro.
Next week has a few events on the British data calendar worth taking note of. Wednesday sees employment statistics, expectations for which are as follows: Claimant Count (+5.0k expected vs. +0.4k previous), Average Earnings (+2.5% expected vs. +2.3% previous), and Unemployment Rate (4.9% expected vs. 4.9% previous). Early post-Brexit private survey data and sentiment results highlight that corporate spending is likely to be curtailed going forward as economic uncertainty weighs on the minds of CEOs & CFOs. Along with capex, hiring is one of the key areas to be impacted by this outlook. As such markets will be approaching next week’s data with caution.
After Wednesday’s employment numbers, on Thursday the July British Retail Sales number will be announced. The consensus forecast calls for a mild rebound to +0.3% from last month’s -0.9% outcome. Brexit is expected to take a bite out of consumer spending much the way it is expected to impact corporate level spending. So like the Wednesday employment statistics, markets will be guarded against Retail Sales disappointment.
In addition to Retail Sales and labor statistics, on Tuesday the British data calendar has the July Consumer Price Index (CPI) result. Expectations are for a +0.5% reading, matching last month’s number. Due to Brexit and the related historic sell-off in GBP a pop higher in inflation is expected over the coming months. Despite this, there is no expectation that the BoE will not hike rates to combat, which is the key relationship that often drives GBP strength on the back of positive CPI numbers.
At the Quarterly Inflation Report last week the BoE made it clear that its priority is stable economic growth and that it is comfortable letting inflation pop higher unchecked, just as it did during the global financial crisis. This means that even if CPI bounces higher next week the BoE will keep interest rates low to stimulate spending. Given BoE guidance, CPI will likely take a back seat over the coming months to GDP and other economic indicators. On the Topic of inflation, next Tuesday the American July CPI number will be published also. Expectations are for 0.0% against a +0.2% result for the two prior months. While currency markets might be looking past British CPI, but that is not at all the case with its peer across the Atlantic. American GDP numbers proved disappointing recently, however employment statistics have been resilient. As such CPI, which is the Fed’s favored measure of inflation, might be the difference maker for an interest rate hike. Financial markets have about a 50% chance of a hike by the end of 2016 priced in. As such there is likely to be a high degree of anticipation and volatility surrounding Tuesday’s release. A negative result could be a lifeline for GBPUSD after two tough weeks.
Rounding out the busy data week is the Minutes from the July US Federal Reserve meeting and policy update. The meeting occurred before the recent strong employment statistics and Q2’16 GDP disappointment, so the minutes won’t capture their impact on the outlook. However, currency markets will nonetheless be sensitive to the tone of the policy committee and what area they are particularly sensitive to.
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