Sterling was the worst performing G10 currency last week. Relatively good labor data was not enough to offset disappointing inflation and news that Prime Minister May is having an increasingly difficult putting forth any coherent plan at all, as first the hard Brexit faction and then the pro-EU side of her own party staged loud revolts.
It was interesting that the latest volley of rhetoric outbursts from Trump, this time about interest rates and the dollar, had a negative impact on the US dollar, causing it to erase all the week’s gain.
The start of the week in currency markets was doubtlessly the Brazilian real, which posted significant gains against every other major currency after centrist parties decided to pool their support behind a single Presidential candidates.
The good news from the labor market last week were overshadowed by lower than expected inflation numbers. We continue to expect another hike in interest rates from the Bank of England this summer, but it is likely that the vote will be a very close one.
Even less predictable is the newsflow from Brexit. The sense of disarray on the Government’s side increased last week, and the possibility of a postponement of next year Article 50 deadline is starting to make the rounds. We think that recent punishment of Sterling is excessive, and that the mere absence of negative news will be enough to keep the pound well supported.
After a very quiet week in the Eurozone, next week the focus will be on the ECB’s July meeting. No change in policy or forward guidance is expected, and we look to the press conference after the meeting to provide more clarity on the Council’s view of trade risks and the failure of core inflation to convincingly trend higher. Also key will be the PMI indices of business activity for July published on Friday.
Political uncertainty is starting to weigh in the US dollar. It will be key to see whether Trump follows up on his off the cuff complaints about rate hikes and the US dollar, but GDP growth for the second quarter should show very strong growth, which together with the fiscal stimulus still in the pipeline will continue to pressure the Fed to keep increasing rates gradually.