Choppy and volatile markets in prospect

The week ahead looks sadly familiar on the geopolitical front, and we can only hope for some form of de-escalation in the conflict as soon as possible.

Understandably the markets will be driven by headlines and rumour again this week, with economic data taking a back seat. However, there are some notable points on the calendar this week that should catch the currency market’s attention, even if only momentarily. The most significant events scheduled are the meeting of the European Central Bank and the US Consumer Price Index, both scheduled for Thursday. We have a very quiet week on the data docket in the UK until Friday, when Gross Domestic Product is released.

Last week was one of the most volatile weeks in the financial markets in living memory. As the geopolitical news worsened and sanctions increased on Russia, risk sentiment and financial instruments gyrated wildly. Over the week, unsurprisingly, due to it being seen as a safe haven currency, the dollar appreciated against nearly all of its peers and, in particular, against the euro. This morning sterling has opened lower again against the greenback but has climbed against the euro. On Friday, sterling finally breached the top of its trading range against the euro that has held since the Brexit referendum in 2016. The euro has suffered in particular due to its proximity to the conflict and its reliance on Russia for energy. With the war worsening, there looks to be little relief to the choppy intraday movements that we have seen recently in the currency markets.

GBP
Sterling unsurprisingly fell against the dollar last week, ending up nearly a cent and a half lower after what was very volatile trading. As we said earlier, with geopolitical headlines dominating traders’ thoughts, the intraday movements were choppy, and this is, of course, will remain the way of things in the foreseeable future. Against the euro, sterling finally appears to have broken upwards through the technical resistance level that, as we said previously, has held for nearly six years. The only data set released this week that is likely to impact the markets is January’s Gross Domestic Product number. After a slight decline in December, a modest uptick is expected, reflecting the return of the consumer in the New Year. Speculation, of course, will continue over the next Bank of England meeting next week with expectations of a further base rate rise helping to underpin sterling.

EUR
The euro has endured a torrid time recently, seemingly being hit with bad news from every direction. The European Central Bank meets this coming Thursday, which, politics aside, is the major economic event this side of the Atlantic. Last Thursday’s release of the minutes from their previous meeting revealed a central bank that was more hawkish than had been anticipated. With inflation being pushed higher in the bloc by the war in Ukraine, the pressure is on the ECB to move towards normalising policy. But with a conflict on its doorstep with unknown consequences, the ECB may err on the side of caution. With this in mind, the markets expect the bank to stick broadly to its asset purchase programmes, winding down the Pandemic Emergency Purchase Programme this month March whilst increasing the Asset Purchase Programme. As important as any tinkering to policy will be Christine Lagarde’s messages at her press conference following the meeting.

USD
Jerome Powell and his colleagues have recently reinforced the case for a .25% rate rise at the next Federal Open Market Committee meeting on the 16th of March. After a particularly strong Non-Farm Payroll number, last week’s employment data strengthened the belief that the economy is now running on all cylinders. The concern for the Fed is how to tame inflation without killing the economy. At present, the rate of price increase is at levels last seen when President Reagan was in power some forty years ago when interest rates were raised to an incredible 21.5% to combat it. During his testimony on Capitol Hill last week, Jerome Powell argued that war has brought more uncertainty and that the Fed needed to be “nimble”. Derivative markets continue to price the prospect of six further rate hikes for the year whilst ignoring the threat of an oil-induced recession. Whether the necessity for such an aggressive series of rate hikes is needed will become clearer after the release of the latest inflation data on Thursday. Analysts are forecasting that the annual rate of the Consumer Price Index (CPI) will rise to near 8%, which would be the highest rate of inflation since January 1981. There are no speakers from the Federal Reserve scheduled as they are in blackout now till their next meeting. Apart from Thursday’s CPI print, the only notable data releases are the weekly jobless total on the same day and the University of Michigan consumer sentiment surveys on Friday.

Farewell Mrs Merkel

In the week that Angela Merkel stepped down from her prominent as Chancellor of Germany, there was some significant developments with Central Banks on the markets last week.  

Central Banks dominated the markets last week with what at times appeared an overload of information emanating from every corner of the globe. The most positive action was taken by the Norges Bank, which became the first G10 central bank to increase interest rates since the pandemic began. The Bank of England was a little more intriguing, but there is a clear shift in expectations in the Monetary Policy Committee (MPC), and this has been reflected in the derivative markets who are now signalling a rate rise, albeit by only 0.15%, next February. The US Federal Reserve were not quite so aggressive, but the “dot plot “did show that committee members were bringing forward the timing of the first move upwards of interest rates to 2022 from 2023. As expected, with the European Central Bank still some months away from tightening, the euro retreated against both sterling and the dollar.

Central Banks

The week began with a sharp sell by the world’s stock markets and a subsequent flight to the safe-haven dollar pushing beta currencies such as sterling south. The potential collapse of the Chinese real estate group Evergrande triggered the move. Although the panic had subsided by Tuesday, the spectre of Evergrande defaulting is still haunting the market and may reappear this coming week. The Social Democrats (SPD) scored a narrow win in the German election yesterday but cannot, as yet form a government. The country now faces months of horse-trading before a coalition is agreed upon and formed. With a relatively quiet week in prospect from a macro-economic perspective, the fallout from the election in Germany will be the dominating factor, certainly in the early part of the week.

GBP

Sterling had an eventful week, initially falling in reaction to Wall Street’s woes before recovering after the Bank of England sprang a hawkish surprise on the markets. The market, as is the MPC, remain divided over the threat of inflation, but with gas prices rising and supply chain difficulties causing shortages, it is hard not to side with the hawks. Indeed, the Bank of England itself is now forecasting inflation to touch 4% by year-end. The GfK Consumer confidence index, released on Friday, has slumped, and despite the Bank’s hawkishness, sterling is starting to look a little vulnerable. It certainly has some headwinds to negotiate with both furlough ending and the problems over the Irish protocol still rumbling in the background. The coming week hasn’t got the fullest data docket with only second-tier data scheduled apart from second-quarter GDP on Thursday.

EUR

Yesterday’s German election failed to deliver a clear winner, and the country now faces a protracted period of negotiation between all the parties. The SPD finished slightly ahead and, at the moment, look favourites to team up with the Greens and one or more of the smaller parties. Angela Merkel will stay as Chancellor until a new government is formed but, in effect, is now a lame-duck politician at a time when Germany and Europe are recovering from the pandemic and need leadership. All markets dislike uncertainty, and it now looks like that is firmly on the cards, possibly for several months. Germany releases its October Gfk Consumer Sentiment data tomorrow, followed by September’s Unemployment level and Consumer Price Index (CPI) on Thursday and Retail Sales on Friday. Usually, these would have the potential to move the euro; however, with the election overhanging the market, any reaction will be limited. The most meaningful data will be the release on Thursday of September’s Eurozone CPI forecast to rise to an annual rate of 3.4%. If it exceeds this level, inflation fears will rear their head, giving the ECB a headache and encourage the hawks in its midst. Before that, Eurozone Consumer Confidence will be reported on Wednesday. The two most influential members of the ECB, Christine Lagarde and Phillip Lane are slated to speak.

USD

The Fed made a decisive move towards tightening its policy last week, and surprisingly, the dollar did not react as strongly as expected. With the yield on US Treasury bonds increasing, the dollar should attract further fans in the week to come, especially if the stock markets start to wobble again. It is quite a busy week for data in the US, with the highlights crammed into next Friday when Gross Domestic Product, Personal Income, and the Feds favourite number, the Core Personal Consumer Expenditure deflator, are all released. Before those, we have Durable Goods to digest this afternoon, Consumer Confidence tomorrow, and on Thursday, the weekly jobless claims total. Possibly as influential for the markets will be the plethora of speakers from the Fed, including Chairman Jerome Powell, who will take to the podium twice. Treasury Secretary Janet Yellen will join him as the US debt ceiling issues continue unresolved. With month and quarter-end on Thursday and October 1st set as the date to approve a stopgap government funding limit, time is rapidly running out, and some nervous times lie ahead.

Scandi

The Swedish Riksbank kept its main benchmark rate unchanged, and Governor Ingves did not tell the market anything new after its meeting last week. The Swedish krone finished the week stronger but is still within the range it has been trading in throughout 2021. This week the latest Retail Sales figures are released on Tuesday alongside the Trade Balance, and on Wednesday, the Consumer Confidence indicator is published.

Norges Bank Governor Olsen did what the market predicted for a very long time and increased the benchmark rate by 25 basis points to 0.25. He cited the ever-improving economy in Europe’s second-wealthiest country and adjusted the rate path higher. The next hike is expected to come in December, just before Christmas. This week we are anticipating the latest unemployment figure, which is expected to have come down further to 2.5% from 2.7%.

Dollar becomes King for the time being

Last week the markets were overshadowed by the events unfolding in Kabul and across Afghanistan. With chaos seemingly engulfing the country, investors turned tail from riskier assets and sought the safe haven of the dollar.

This change in sentiment pushed sterling down almost 1.5% whilst the euro to its lowest level for nearly a year. The UK enjoyed a mixed week of macroeconomic data, which started with better than expected employment data; however, the inflation rate was lower than forecast, as were Retail Sales. A picture of a patchy and uneven recovery in the UK emerges when the data are taken together. This is likely to stay the case for the foreseeable future as the spread of the delta variant of Covid continues. Sterling also gave up some of its recent gains against the euro to end the week nearly a cent lower as a by-product of the dollar’s strength.

Afghanistan and, in particular, any signs of America’s hasty withdrawal prompting expansionist moves from China towards Taiwan will continue to concern the market in the week ahead. Also of concern will be the spread of the Delta variant of Covid, and it will be a surprise if risk sentiment improves too dramatically. Away from geopolitical worries, one event will preoccupy traders’ thoughts, and that is the Federal Reserve’s annual economic Jackson Hole Economic Symposium starting on Friday. Until then, with many bankers and investors still preferring their sunbeds to the office desks, it will probably be a quiet start to the week, especially in the UK and Europe, as there is very little on the data docket to excite.

UK

As we said previously, sterling had a miserable week that matched the weather in the UK. And although the weather is forecast to improve, sterling is likely to remain under pressure from the dollar for a while longer. The one bright sign last week was the UK’s latest unemployment report, but with analysts and traders picking on the less than satisfactory elements, it became apparent that the markets were looking for a reason to sell sterling. This week’s domestic data is relatively thin on the ground, with the only major release being the preliminary, or flash, Purchasing Managers Indexes (PMI) released as this report reaches your inbox. The figures are likely to have been distorted by the recent pingdemic as well as supply disruption and are unlikely to move sterling too much.

EU

As with sterling, the single currency remains at the mercy of outside events. With sentiment so risk-averse, it is hard to see too much of a recovery by the euro against the dollar. However, it remains towards the bottom of its recent trading ranges and could well be slightly oversold by institutions, so it may bounce back from its current levels. The euro gained against sterling last week, but this was the dollar bossing sterling more than any euro strength. As with the UK, there is very little to get economists excited this week with just the August Purchasing Managers Indexes released today.

Apart from these, it’s all German data starting tomorrow with Second Quarter Gross Domestic Product followed on Wednesday by August’s Ifo Business climate before the week closes with the Gfk Consumer Sentiment surveys. The only spokesperson from the ECB scheduled is Isabel Schnabel, who is speaking both tomorrow and Thursday.

US

Alongside the geopolitical implications of the American withdrawal from Afghanistan, the only other event that the market reacted to last week was the release of the minutes from July’s Federal Open Market Committee meeting. The minutes were non-committal on whether earlier tapering was in order now, with “several” saying a reduction in bond purchases may be more appropriate “early next year”. This week’s key event again revolves around the Federal Reserve, with the Kansas Federal Reserve hosting, albeit remotely, the annual Jackson Hole Symposium, which starts on Friday.

With the Delta variant of Covid forcing the meeting online, the Fed may disappoint the market by choosing to hold policy steady. If this was to happen, the dollar could sell off quite sharply. Data flow starts this afternoon with the August PMIs, followed by New Home sales tomorrow and Durable goods orders on Wednesday. On Thursday, revisions to second-quarter GDP and the weekly jobless report are released. Interestingly, the data week will close on Friday with one of the Fed’s key metrics, the Personal Consumption Expenditures Price Index.

Scandi

The Swedish krona suffered as concerns about geopolitics and financial market sell-offs caused beta currencies to weaken. Moreover, PM Löfven declared on Sunday that he will step down in autumn and won’t be the leader of his party. This does not warrant a new election but will merely see another party member of the Social Democrats take the lead and prepare for next year’s General Election. We will pay attention to the Unemployment Rate on Thursday and Retail Sales as well as GDP on Friday.

The Norwegian krone continues its slide, this time caused by the ever-decreasing core inflation figure. Speculation is therefore rife that Norges Bank Governor Olsen may have to delay his rate hike given the fragility of the recovery.

Another strong week for Sterling

Sterling enjoyed a solid week last week, touching its highest levels against the euro for 18 months in quiet trading before retreating on Friday as speculators took their profits. Following a solid rebound in Gross Domestic Product, helped and gave encouragement thoughts of the economy returning to pre-pandemic levels before the year is out.

The Bank of England is now firmly positioned as one of the favourite central banks to start implementing a less accommodative policy relatively quickly, as is the Federal Reserve in the US. Their stance will continue to strengthen these currencies against most of the G10, with some exceptions such as the Australian Dollar. The euro is one of the currencies most likely to suffer from this scenario and, despite a recovery in its fortunes of Friday, looks vulnerable to suffer further falls.

The week ahead is another quiet week for macroeconomic data from the Eurozone. Still, this information gap will be adequately filled by a full week of statistics from the UK and some interesting releases from the US.

With the markets firmly in the summer doldrums, currencies can reasonably be expected to stay within their current ranges unless an unexpected event upsets the calm. However, with the Delta variant of Covid causing more problems in the US, a shock from that direction cannot be totally discounted, and it may already be affecting growth prospects if Friday’s unexpectedly sharp fall in US Consumer Confidence is anything to go by. Finally, we will be monitoring risk sentiment closely after the weekend’s events in Afghanistan and any regional repercussions from them.

UK

As previously mentioned, sterling had a good week, especially against the euro. The data flow gets underway tomorrow with the release of the Unemployment rate for July, which is expected to show a modest fall. However, it must be remembered that the ongoing job support schemes still distort it. On Wednesday, the July Consumer Price Index (CPI) is released, a figure that is likely to be slightly unreliable due to the distortion to prices caused by last year’s reopenings in the same month. It will come as no surprise if a lower rate is recorded and probably ignored by the markets. Finally, on Friday, July’s Retail Sales and the Gfk Consumer Confidence readings will be released. Hopefully, after this tumult of information, we should have a much clearer picture of how the economy is recovering, which will set the short-term direction of sterling. Apart from the macroeconomic information, the other influences on sterling’s path will be the speed of the spread of Covid and disputes over the Brexit treaty, which still appear to be rumbling in the background.

Eurozone

A relatively quiet week of data for the Eurozone is in prospect. Still, the reports that are released should make for interesting reading but are unlikely to lend the euro too much strength against either sterling or the Dollar. First off the printing press is the first revision for Second Quarter GDP tomorrow morning with a consensus forecast of around 2.00%. Next up on Wednesday is the Consumer Price Index, which analysts expect to show a relatively subdued reading of 2.2% compared to its main trading partners. Finally, with the German election looming in September and a tight race to replace Angela Merkel developing, the market is starting to watch opinion polls more attentively, and they may come to influence the euro’s direction.

US

With inflation still showing underlying strength in the US and employment on the up, the Dollar continued to shine as more officials make a case for a policy change. Many in the currency markets expect some talk concerning this at the Federal Reserve’s Jackson Hole Symposium at the end of this month. Ahead of the meeting and with a shortage of scheduled speakers from the Fed, Wednesday’s release of the minutes from July’s Federal Open Market Committee meeting will take on more importance than usual. The data week starts tomorrow with July’s Retail Sales, which are expected to be distorted by supply chain disruptions in the car market. Also on the slate tomorrow is July’s Industrial Production, and in addition to the FOMC minutes on Wednesday, Housing starts are released. Finally, the weekly Jobless claims report is published on Thursday as usual.

Scandi

It was another rather uneventful week for the Swedish krona, which was once more very much rangebound against all G10 currencies. The inflation figure came in as expected, thus strengthening the current sentiment that the Riksbank will not take any action for the foreseeable future. This week sees no important data releases.

The Norwegian krone suffered as the White House called for oil production to be increased, despite falling demand. Such macro events seem to drive the krone rather than data releases. This week Governor Olsen is expected to keep rates unchanged on Thursday. The press conference will be a significant event where market participants will look for hints if an interest rate hike is coming or not, given the past eight months of less than terrific data. At the start of the year, a hike for September was pretty much a certainty.

UK and US dominate markets

As expected, two events dominated the market’s last week, the monthly meeting of the Bank of England’s Monetary Policy Committee and the employment reports from the US.

The Bank was moderately hawkish and is now firmly in the camp of central banks looking to tighten sooner rather than later. As expected, sterling gained against the euro over the week and should continue to do so with the Bank of England now clearly set to tighten before the European Central Bank. The dollar finished the week on an upward trajectory after the Non-farm Payroll report was towards the higher end of estimates reporting just under one million new jobs created last month.

As we approach the height of the vacation season in the UK and Europe, we expect volatility to remain low certainly in most currencies until the end of the month. The upcoming week is virtually devoid of new macroeconomic data from Europe to drive the euro’s price action. Still, there are significant data releases from the US and the UK for the markets to digest. After Friday’s excellent employment number, the Fed’s other main concern, inflation, will occupy the markets when July’s data is reported on Wednesday. The first reading of second-quarter Gross Domestic Product is released in the UK, which is expected to show healthy growth. Sadly, as we have become accustomed to, the daily Covid case numbers will also be studied by investors most closely in the US, where they appear to be increasing. We will also be watching Geopolitical developments as there may be some adjustments to risk appetite on the horizon caused by increasingly belligerent Iran.

UK

The Bank of England’s finger is now firmly on the tapering trigger, and they are ready to gently start cutting back on bond purchases, possibly as early as next month. As the market absorbs the fact that easy money is ending, we expect to see some appreciation in sterling’s value. With life rapidly returning to normal and travel opening up, the economy should continue to expand, lending sterling further support. We should see how the gradual reopening has affected growth this week when the preliminary second quarter’s Gross Domestic Product figures are released on Thursday. Analysts are predicting growth in the region of 5%; however, it should be remembered that this is a backward-looking number and may represent a high-water mark for growth. Also released on Thursday are June’s Industrial and Manufacturing Production.

Euro

The euro looks at the mercy of both the dollar and sterling in the week ahead with hardly any data to alter the market’s bearish perception. With the ECB very unlikely to tighten policy soon, and the single currency will stay vulnerable to dollar strength. This week, there is a virtually blank data docket with only the ZEW Sentiment surveys released tomorrow, which may well fall for a third consecutive month, Germany’s Consumer Price Indexes released on Wednesday, and Eurozone Industrial Production on Thursday. Away from macroeconomics, opinion polls concerning next month’s German elections are starting to influence the euro’s direction as Mrs. Merkel prepares to step aside after nearly 16 years in power.

US

After a mixed bag of employment data early in the week, we saw a solid set of data last Friday when the important Non-farm payrolls for July reported that just shy of one million jobs had been created. Employment gains were at the top of expectations, and unemployment levels are also falling while wages and the participation rate are increasing.

With Fed Governor Richard Waller suggesting recently that a gain of two million jobs over the next two months would be enough for the Federal Reserve to start tapering bond purchases, it came as no surprise that the dollar made gains after the figures were seen. This week sees further data released that will influence the Fed’s decision-making process starting this afternoon with the Job Opening survey (JOLTS) release.
Next up, we have July’s Consumer Price Index on Wednesday, expected to be 5.3%, and the July Producer Price Index on Thursday. With a dual mandate to deliver full employment and stable prices, any further inflationary pressures will encourage additional thoughts of tightening, leading to further dollar appreciation. We will also be watching the weekly jobless number on Thursday and keeping an ear open for speeches from members of the Fed.

Scandi

The Swedish krona was once again, rather unsurprisingly, rangebound within a narrow 0.20% range against most G10 currencies. This week may see some more volatility given the thin market and the macro data being released. We are particularly interested in the Service and Production figures released alongside the Industrial Order figures on Tuesday. Later in the week, more specifically on Friday, we will get the latest inflation figure. On a Year-On-Year basis, it is expected to be unchanged at 1.3%.

Unlike its neighbour, the Norwegian krone, which is not performing as well as most market participants predicted it to at the beginning of the year, has weakened steadily throughout the summer and reached levels against the EUR last seen in 2020. This week we will pay attention to the Industrial Production figures out today and the Inflation data on Tuesday. It is expected to have decreased to 1.1% from 1.4% on a Year-On-Year basis.

Lively week before Europe goes on holiday

As Europe begins it summer holiday, there’s been some interesting developments in the markets last week. 

The dollar reigned supreme for most of last week as the markets oscillated between optimism and pessimism as worries over the spread of the delta variant ebbed and flowed. Sterling, as befits a beta G10 currency rode the wave of changing market sentiment, mostly ignoring the mounting number of Covid cases, the ‘pingedemic’ and the escalating disagreements with the EU over the conditions regulating trade in Northern Ireland.

The week’s highlight was the press conference after the monthly European Central Bank meeting, during which Christine Lagarde reiterated the decision of its recent strategic review to target inflation at 2%. Unlike the US and UK, whose primary concern is getting inflation down towards this level, the ECB will most probably have to replace its version of Quantitative Easing the PEPP scheme. The market certainly took this view, and the euro suffered as a result losing ground generally and has opened again this morning below $1.1800

There continue to be some signs of splits in the major central banks between those worried by the threat of inflation and those that see the recent surge as only transitory. Last week the doves won out in the ECB despite the powerful voices of the Belgian and German Central banks raising doubts over the policies that are being adopted. There also appears to be disagreement, judging by their recent speeches, arising in the Bank of England between the openly hawkish members (Michael Saunders and Dave Ramsden) and the markedly dovish (Jonathan Haskel and Ben Broadbent). This week it is the turn of the Federal Reserve to hog centre stage with their monthly Federal Open Market Committee meeting on Wednesday. Although it is unlikely that any policy change will be announced, every word in Jerome Powell’s press conference following the meeting will be studied for hints concerning tightening. It is also month-end this week, and with a tsunami of data due from the US, it should be a good week for those that like volatility!

UK

It looks like a quiet week ahead for sterling with no domestic economic data of any importance on the agenda for release and only the Bank of England’s Dr Gertjan Vlieghe slated for a speech. Sterling is again most likely to be buffeted by the dollar’s strength and could be vulnerable to a further dip, especially if the Federal Reserve’s meeting on Wednesday is perceived as more hawkish than anticipated. Despite the apparent slowing of the spread of the delta variant, the effects of the almost total easing of lockdown are still to be fully felt. These worries will keep investors nervous, as will the so-called “pingdemic,” which is starting to affect supply chains, which may cause the economy to suffer slight setbacks. The ongoing issues with the EU over Northern Ireland, which still show no sign of a satisfactory outcome, could also start to become more troublesome to the pound. However, this morning sterling is still trading up near its highest levels of last week at €1.1675.

Euro

With most of Europe either on vacation now or preparing to go, there could be more volatility in the single currency in the week ahead than usual due to thin markets and a plentiful amount of macroeconomic data to digest. After the split in the ECB became apparent last week over its policy to target inflation at 2% for years ahead, the publication of the flash July Consumer Price Index on the last Friday before August will be studied with interest. However, even if it is above the ECB target, it is almost certainly a transitory number and will be quickly discounted. Of more interest will be the second quarter Gross Domestic Product (GDP), also released on Friday, which is expected to show that the Eurozone has technically exited from recession. The flow of data starts later this morning with the July German Ifo Business Climate survey. Next up is the GfK German Consumer Confidence survey on Wednesday and the Eurozone confidence surveys for July on Thursday. Thursday also sees the release of German Unemployment figures and Consumer Prices.

US

As always, the US is likely to dominate the show in the upcoming week, with Wednesday’s meeting of the Federal Reserve Open Market Committee and two major data releases. The Fed is exceedingly unlikely to signal any immediate tightening, with analysts generally agreeing that the Jackson Hole Symposium in late August is the most likely backdrop for any tapering to be announced. However, with the US, so far at least, not suffering as badly as the rest of the world from the Delta Variant and with most inflation-related data firmly in the red zone, the tone of Jerome Powell’s press conference is likely to encourage thoughts of tapering sooner rather than later. Ahead of the FOMC, we have the release of New Home Sales later today to study and then Durable Goods Orders and Consumer Confidence tomorrow. Then following the FOMC on Wednesday, Second Quarter Gross Domestic Product and the weekly Jobless data are reported on Thursday. GDP could prove to be a psychological turning point if, as predicted, it is above 9.5%. At or above this level, it would signal a return of all the output lost to the pandemic. Finally, the month closes with one of the Fed’s chosen inflation measures, Personal Consumption Expenditure, on Friday. All of which should make for a lively month end!

Scandi

The Swedish krona was once again very much rangebound against most G10 currencies as the majority of Swedes were enjoying their summer holidays. This week is expected to be a quiet one, with most people returning to the cities and work the first week of August. Thursday is somewhat of a super-day with Consumer & Manufacturing Confidence surveys being released alongside the latest GDP figures and the unemployment rate. The latter is expected to sit uncomfortably high at 9.8%.

Over in Norway, the summer lull has the currency as well as the country in its grip. This week we will pay extra attention to the Unemployment figure out on Friday. It is expected to come in at 2.9%.

All eyes on Europe for the week ahead

All eyes focus on Europe this week, as summer holidays begin.

European Markets

The currency markets had a quiet time last week, which is hardly surprising as we approach the peak summer holiday period. Ranges continue to get narrower, and volumes continue to decline. There were, however, some interesting developments, not least from the Bank of England.

After both the Royal Bank of New Zealand and the Bank of Canada took a more hawkish stance, the bank of England somewhat surprisingly also moved further in that direction. The BoE’s Michel Saunders and Sir Dave Ramsden, typically seen as doves, made speeches referencing the need to tighten policy by curtailing asset purchases soon, making the next Bank of England meeting in a little over three weeks more interesting than it may have been expected to be.

However, in his testimonies to Congress, Jerome Powell remained cautious and seemed to have the return to near full employment uppermost in his mind.

With most of the remaining pandemic restrictions in England are lifted today, Prime Minster Boris Johnson, who is isolating, as is Rishi Sunak, urged the public to “please be cautious”. Most supermarkets and London Underground are maintaining a requirement to wear masks that should help ally some fears, but hospitalisations will be closely watched. In common with the UK, Europe faces a rapid growth in case numbers, and the main event this week, the monthly European Central Bank will be held against this backdrop. There is little chance of any policy change, and with the European recovery lagging behind the US and the UK, the euro will remain vulnerable as both the US and the UK start looking to tighten policy.

UK

Over the weekend, investor’s concerns over the relaxation of Covid restrictions and rising cases numbers have grown. These worries are capping sterling at the moment, and it has opened around €1.1650. As in recent weeks, the rate of hospitalisations, more than the case count, will be watched for any marked upswing. However, with a reported 500,000 people “pinged,” some concerns are starting to grow over the impact of this on the economy, and these worries may weigh on sterling in particular against the dollar. Apart from Covid reports, there is little on the data docket to concern sterling this week.

The only significant figures arrive on Friday when the GfK Consumer Confidence survey, Markit’s Purchasing Manager Indexes, and Retail Sales are released. This morning the BoE’s Jonathan Haskel is giving a speech, and on Thursday, Jim Broadbent will follow suit, and after last week’s hawkish statements, we will be listening to see if they continue with the same rhetoric. If they do so, it will signal that the Old Lady has altered course, and that would encourage some buyers back into sterling.

Euro

It is the European Central Bank’s (ECB) turn to take centre stage this week, with its monthly meeting taking place on Thursday. With Covid cases on an upward trajectory again in Europe and with much of the continent still lagging behind the US and the UK in vaccination levels, the euro will stay under pressure as its economic recovery starts to look even more fragile. Despite these worries in the background, the ECB is expected to adopt a slightly more hawkish stance. This data flow begins later this morning with European Construction reports and the monthly report from the Deutsche Bundesbank. Then there is a lull till the ECB meeting on Thursday, followed by the customary press conference from Christine Lagarde. On Friday, Markit will release its Purchasing Managers Indexes for the Eurozone and its constituent countries.

US

For the first time in a few weeks, the Fed will take a step back this week with no speakers scheduled as they enter the blackout period before the next Federal Open Market Committee meeting. With little on the data front to occupy traders, they will continue to digest the overridingly cautious tone that Fed Chairman Jerome Powell took last week over the threat of inflation. Increasingly the markets are split over whether the Fed is being too slow to react or is right to be cautious. Economists fear that if the Fed tightens too quickly, the economy may tip back into recession. Admittedly, there are worrying signs that this may be happening, and yields in the US Bond market, which many currencies traders follow intensely, are starting to reflect this.

The uncertainty surrounding the recovery looks set to continue, but it could be a quiet week as there is little to disturb the summer doldrums that the markets find themselves in. The data week starts with the release of the NAHB Housing Market Index today and tomorrow, June’s Housing Starts and Permits. On Thursday, the weekly Jobless total is released, and we close the week with the Markit Purchasing Manager’s Indexes.

Scandi

The Swedish krona lost ground last week as the inflation figure came in lower than expected on a Year-On-Year basis. It is trading at the higher end of the narrow range against the euro and sterling, but this is nothing unusual as July is usually a krona negative month. This week is very quiet from a data perspective, with only the Producer Price Index on Thursday carrying any importance.

Some speculation in the financial press about the Norwegian krone and the forthcoming rate hike was the only interesting piece of information last week. This week is looking relatively uneventful with no significant data releases.

Will Sterling deliver again?

We ask is Sterling going to deliver again? After a week that saw consistent buying of the dollar, encouraged by mid-week rebalancing needs, there was a bout of profit-taking on Friday despite the US Labor Department’s employment data strength.

A headline figure of 850,000, although towards the higher end of the forecasts, didn’t lead to further buying of the dollar, although it still managed to end the week almost a cent higher against sterling. It is becoming apparent that COVID has changed not only the jobs available but, as significantly, people’s attitudes towards work, with many permanently leaving the workforce or taking early retirement. With a shrinking pool of available labour and growing demand, wages are likely to start edging higher. As they do, the calls for the Fed to tighten sooner than expected will increase, and the dollar will continue to find favour.

The week ahead is much quieter on the data front, but there are potentially some interesting reports to study as well as an England performance to savour (we hope!). With the so-called sausage wars apparently, fizzling out, attention is now likely to turn to the increasing number of cases of the Delta variant of COVID in the UK and Europe. With, so far, hospitalisations in the UK falling far below the previous levels, the impact is likely to limited to the psychological damage that rising case numbers can cause. Across the Atlantic, we have a holiday-shortened week with the US closed today for Independence Day, which for many signals the start of the holiday season; consequently, volumes may be lighter than usual, which tends to exaggerate moves.

UK

Sterling has opened a little firmer at $1.382 against the dollar this morning and is little changed against the euro at €1.1650. Overall, it is still performing relatively well in comparison to its G10 counterparts. This strength is partly down to the market’s expectation that it will follow the Federal Reserve’s policies quite closely when the time comes to tighten. With COVID cases rising across the UK, analysts are starting to question how much the public’s confidence will be impacted. If the growing hesitancy to return to everyday life continues to increase, economic recovery may stall, which would destabilise sterling. We have a barren week report-wise until what will undoubtedly be dubbed frantic Friday when May GDP data, Industrial Production, and Manufacturing Production are all released. After last week’s adverse reaction to his Mansion House speech, any further comments from Bank of England Governor Andrew Bailey will be studied for their dovishness.

Euro

Another quiet week is in prospect on the European data front, leaving the euro at the mercy of the dollar. After it shed over a cent in a week, it still looks a little vulnerable; however, it is opening a little better at $1.1855. Concerns over the rise in cases of the Delta variant of COVID on the continent are starting to mount. If the numbers continue to increase, this will lead to further pressure on the euro. Whilst making good progress, Europe is still behind on its vaccination programme, making its economies more vulnerable to the rapid spread of this variant. Today, the data week kicks off with the Sentex Investor confidence surveys for the Eurozone and Markit Services Purchasing Managers Indexes. Tomorrow, we have further investor confidence reports with the release of the ZEW Surveys for both Germany and Europe. Eurozone Retail Sales data is also scheduled for tomorrow. We expect an upgrading in growth prospects on Wednesday when the European Commission’s summer forecast is released, as is German Industrial Production. There is also a special meeting of the ECB starting over supper tomorrow evening to discuss strategy and possibly set a new inflation target.

US

After recent comments from Federal Reserve’s Christopher Waller and Robert Kaplan, the dollar will continue to appreciate if the economic data continues to show strong growth. After last week’s excitement over employment, we return to a less exciting calendar. First up, Job Openings and Labour Turnover statistics (JOLTS) are released tomorrow, which will be studied for further clues to how the labour market is adapting to the post-COVID world and the frequency that people are swapping jobs. Some analysts think that these changes will add to the upward pressure on wages which is yet to happen. The ISM Services Purchasing Managers Indexes are also published tomorrow. On Wednesday, we have the release of the minutes from the most recent Federal Open Market Committee meeting, which will be dissected for further clues to how strong the hawkish tendency is and who it includes. Finally, as usual on a Thursday, the latest weekly jobless total will be announced and studied to see if the reduction in benefits is continuing to encourage people back to work.

Scandi

The Swedish krona was very much rangebound despite prime minister Löfven inviting the opposition to try to form a government after losing a motion of no confidence. So far, they have been unsuccessful, and a new election is unlikely to be called by the incumbent. We have now officially entered what is usually a calm period for the Nordic region’s largest economy. This week kicks off with the PMI Services figures, the Budget Balance on Wednesday, followed by the Industrial Orders and Production, Gross Domestic Product, and the latest Household consumption data. Thursday will see the anticipated Swedish Housing Data being released.

The Norwegian krone has been lacklustre lately, and with the summer holiday now in full swing, most market participants expect it to be somewhat rangebound for the next few weeks. This week we will get the industrial production figures out on Wednesday and the latest GDP figure.

Denmark gets a mention this week as it is the last Nordic country left in the Euro2020 championship and is playing against England in the semi-finals on Wednesday. Despite this rather spectacular achievement (and inevitable increase of Carlsberg sales), no market participant expects this feat to impact the current EURDKK peg nor levels.

Currency markets look to Federal Reserve

Currencies continued to trade in the familiar tight ranges for most of last week as the markets awaited the US Consumer Price Index (CPI) for May, which, when published, reported the highest core inflation figure for 30 years.

Investors remain concerned with the inflationary pressures that appear to be growing as the developed world recovers from the pandemic and how quickly central banks will stifle uptick by tightening policy.

Initially, the dollar rallied before falling back and then rallying again into the close on Friday as the US Bond market belatedly reacted to the CPI data and yields increased. The pound was buffeted by these outside influences and has opened this morning a little easier than last week at $1.4100.

Another potentially busy week lies ahead with key data from the UK and the monthly Federal Reserve Open Market Committee (FOMC) meeting. After last week’s surprisingly high inflation report from the US, pressure has increased on the Federal Reserve to tighten policy. The markets will hang onto every word Jerome Powell says at the press conference following the meeting for any hints to a change in policy. There is an avalanche of reports from the Office for National Statistics (ONS) over the next few days for the pound to digest in the UK. In the background, as so often, there is an ongoing Brexit dispute with the EU rumbling on. The so-called “sausage wars “seem likely to continue into this week as the tricky issues of the Northern Ireland Protocol remained unresolved. Hopefully, the Euro 2020 tournament will be less contentious!

UK

The pound had a relatively quiet week last week but may become more vulnerable this week as the final easing of restrictions on the 21st June looks likely to be delayed and tensions between the EU and the UK show little sign of easing. However, as has often been seen, the EU likes to take negotiations to the last minute. So far, the impact of the dispute over the Northern Ireland Protocol has been muted, with sterling virtually unchanged against the euro in the last week at €1.1650. We have a data-packed week in front of us starting tomorrow morning when the ONS will release Average Earnings and hopefully Employment figures that are continuing to improve. On Wednesday, it’s the UK’s turn for CPI, which is likely to show a rise towards the 2% level whilst not rising as quickly as the US. The week closes out with May’s Retail Sales which several analysts expect to disappoint after April’s sharp rise. We will be listening to Bank of England Governor Andrew Bailey when he speaks tomorrow afternoon for any comments on the morning’s unemployment data.

Euro

As expected, at their monthly meeting last week, the European Central Bank played down any chances of tightening policy soon. Whilst not unexpected, the market turned against the euro, and some quite heavy selling occurred, which pushed the single currency to below $1.2100 against the dollar. It remained against sterling, but both currencies remain vulnerable to any breakdown in the ongoing talks over the trade issues surrounding Northern Ireland. An extremely quiet week appears to lay ahead with mainly second-string data on the docket apart from Eurozone Industrial Production this morning, German CPI tomorrow, and lastly, May’s CPI for the Eurozone on Thursday.

US

The highlight of the week for financial markets, generally not least the currency markets, will be Wednesday’s FOMC meeting. However, with the markets entering summer mode and volatility decreasing, it is unlikely that the Fed will want to rock the boat by discussing tapering; indeed, it is most likely that Jerome Powell will do all he can to avoid the subject at the press conference. Only two reports stand out on the data docket: May’s Retail Sales and Industrial Production, both of which are released tomorrow. The retail sales data may unsettle the markets as they are likely to be distorted by disruptions to the car market caused by the shortage of semiconductors. Away from financial data, President Biden will continue his travels this side of the Atlantic with what should be interesting meetings with President Putin from Russia and his Turkish counterpart President Erdogan.

Scandi

Even though macro-data came in worse than expected last week, the Swedish krona kept on strengthening confirming what many analysts had written earlier about its seasonal performance. We are now in official krona strong ground that usually lasts until Midsummer and sometimes until the last Riksbank meeting in July which is the last one until the long summer holiday ending in mid-August. This week sees no major data releases which means technical and seasonal traders may outnumber day traders looking for quick profits.

The macro data from Norway also provided some sombre readings last week, in particular the latest CPI figure which was much lower than expected. It prompted the financial press to seriously question whether a rate hike from Norges Bank Governor Olsen will come in September, some going as far as saying that the Norwegian krone now has become a two-way bet. Volatility against most G10 crosses is expected to remain high throughout the week until the Deposit Rate announcement on Thursday. The market expects Governor Olsen to stay put but will closely listen to what he has to say regarding last week’s low inflation figures during the press conference.

Is the US recovery stalling

After a week of anticipation, the non-farm payroll report came in at a slightly disappointing level and encouraged sellers of the dollar to reappear. With employment rising at a lower than expected 559,000, the pace of the recovery in the US and the subsequent tightening of economic policy is starting to be questioned by investors.

However, on closer analysis, the problem is not a lack of jobs but a reluctance to return to the workforce.

This hesitancy by workers is leading to a squeeze on wages, although there are nearly 8 million fewer people employed than at the start of the pandemic. This combination of factors presents the Federal Reserve and the currency markets with a problem. The market perceives that the Federal Reserve should be starting to tighten policy to control inflation but is boxed in until employment drops.

Looking ahead into this week, events are likely to be dominated by worries over a possible surge in Covid cases in the UK caused by new variants, inflation concerns, and the monthly meeting of the European Central Bank on Thursday. With new variants occurring and cases increasing, there have been doubts cast over the further lifting of restrictions on June 21st. Still, with most of the country’s businesses open, the damage caused by delay is more likely to be psychological and damage confidence. However, with travel restrictions increasing and the chances of a vacation abroad receding, the euro may become increasingly vulnerable as the southern European countries miss out for a second summer in a row on the UK holidaymaker boosting the local economies. The G7 summit meeting also takes place this week at Carbis Bay in Cornwall to discuss the world’s economic fightback.

UK

The pound flew the flag for the G10 currencies last week against the strengthening dollar and has opened this morning at $1.4140 whilst staying relatively strong against the euro at €1.1620. However, with the government’s Matt Hancock saying yesterday that they were “absolutely open” to delaying the next stage on the roadmap to normality and concerns over the efficiency of the vaccines, worries will start to mount about whether consumer confidence has returned too early. If these fears grow, sterling could well begin to drift lower as the concerns of a stagnant economy and rising inflation come to the fore. this week Andy Haldane is slated to speak, who is always thought-provoking and maybe more so than usual as he is soon to be free from the current constraints of his current role as Chief Economist of the Bank of England. On Friday, we will be studying how the economy is performing when both Industrial and Manufacturing data are released, along with a snapshot of April’s Gross Domestic Product.

Euro

The euro slipped against both the dollar and the pound last week and has opened at just above $1.2150 this morning for what is sure to be a busy week for the single currency. As with the UK, concerns are growing over the spread of the Delta variant across the continent and the impact that the travel restrictions that the UK has imposed on holiday destinations will have on the economy. We have a plethora of data to digest head of the monthly ECB meeting on Thursday starting tomorrow with the ZEW* Economic Sentiment indicators, German Industrial Production and Employment, Eurozone Employment, and its GDP. Wednesday is a quiet day with only regional data to digest, and on Thursday, the ECB meets.

* Zentrum für Europäische Wirtschaftsforschung – Centre for European Economic Research

US

The non-farm data was slightly weaker than expected on Friday, and immediate thoughts of tapering and tightening were returned to the back burner and with them the recent dollar strength. As a result, some analysts think that the greenback may now ease ahead of the next Federal Open Market Committee meeting on June 16th. However, it is unlikely to see too much movement before Thursday when alongside the regular weekly jobless claims numbers, May’s Consumer Price Index (CPI) is released. CPI is likely to show a rise towards 4.8%, its highest level since the early 1990s, and any substantial increase on that forecast rate will reignite the tapering debate. As usual, ahead of the monthly Federal Open Market Committee meeting, Fed officials are in speech blackout mode until after the next meeting on June 10th.

Scandi

Sweden celebrated its National Day on Sunday and last week saw the krona strengthen against the G10 currencies. However, it has so far been a quite lacklustre six months period for the Nordic region’s largest currency which was tipped to be one of the best-performing currencies of this year at the outset. Instead, it has been stuck in quite a narrow range throughout most of 2021. This week will get the CPI figures on Thursday, which are expected to come in at 2% on a year-on-year basis and a positive change of 0.4% month-on-month.

In Norway, the week kicks off with the Industrial Production figures for April this morning, and the CPI and PPI figures are released on Thursday. Inflation is expected to be on the high side, at 2.9%, but that would be lower than in the past four months. If worries about inflation cool off, there is a chance that the market might start questioning whether Norges Bank Governor Olsen will increase interest rates come September as widely is anticipated. This kind of speculation is behind the recent Krone weakness we have experienced.