Post date: 16/08/2021 13:19
A downward surprise in US consumer expectations would normally be shrugged off by financial markets. However, thin August trading meant that this second-tier data print late-Friday had an outsized impact on markets that had mostly ignored the much more critical CPI print a couple of days earlier. US rates gave up their weekly gains in the space of a few hours and the dollar sold-off against nearly every other major currency. Commodity currencies benefited the most, with the conspicuous exception of the Brazilian real, snared by domestic political problems. This week there is not much in the way of major news out of the US or the Eurozone. Inflation data out of the UK on Wednesday could move the needle on the pound. The main event of the week will, however, be the expected interest rate hike from the Reserve Bank of New Zealand very early on Wednesday, the first developed economy to do so since the start of the pandemic.
While the pound has been in a holding pattern lately, this may well change this week, as it is the UK's turn to release its July inflation data. Markets are expecting a pullback from June's elevated reading, but we think that the general trend worldwide towards surprises in this increasingly key macro measure means the risks are to the upside. This would increase pressure on the Bank of England to start removing monetary accommodation, perhaps as early as the first quarter of 2022, and would be supportive of the pound.
Mired in typical August trading torpor and the almost complete absence of market moving data releases or policy announcements, the euro should continue to trade in a tight range against other major currencies until the big summer event: the late-August Jackson Hole meeting of the world central bankers. We do think that the 2021 floor of 1.17 versus the US dollar should hold and perhaps provide buying opportunities until then.
The much-awaited inflation data for July published last week in the US did not entail any major surprises. Inflation did stabilise, albeit at a high level, and doves quickly seized on this as evidence that the inflation spike will be short-lived. Rates and currencies did not react much, however, until two days later, when yields fell after a poor consumer confidence report. This week's data in the US is mostly third tier, and the minutes for the FOMC’s last meeting are unlikely to provide much insight given the publication lag. The dollar is likely to trade listlessly until the Jackson Hole central bank bash in late-August.