GBP USD meandered between the 1.20 and 1.21 ranges last week before US inflation data dealt the dollar a chastening blow, catapulting the pair higher.
The cooler-than-expected consumer prices report for July spurred expectations that the US Federal Reserve will become less aggressive when making its next interest rate decision as hopes grow that inflation has peaked.
The Fed indicated it wants evidence of several monthly price declines before reining in its policy tightening to tackle inflation currently running at four-decade highs.
The pound pared much of its gains against the dollar on Friday after gross domestic product figures showed Britain’s economy contracted in June – but less than feared. This reinforced the Bank of England’s (BoE) recent prediction that the UK will enter a long recession from the final three months of this year.
GBP USD ended the week in the 1.21 mid-range.
Inflation data in focus for the pound
Once again, inflation data takes centre stage in the week ahead – this time in the UK. On Wednesday, the July consumer price index (CPI) hits the headlines, with the BoE forecasting inflation – which soared to a fresh 40-year high of 9.4% in June – could peak at 13% later this year, way above its 2% target.
Economists expect the data to show inflation accelerated to near double digits in July – piling pressure on the BoE to tame inflation.
The UK central bank recognised it must act faster to reel in surging prices, hiking rates by half a percentage point to 1.75% earlier this month – its most significant move since 1995. If the CPI reading meets or exceeds the consensus, it could cement another 50 basis points lift in September.
A busy week in the UK economic calendar sees a raft of influential data sets land:
• The ILO unemployment rate on Tuesday
• The retail price index on Wednesday
• Consumer confidence on Thursday
• Retail sales on Friday
Fed minutes in focus for the dollar
Wednesday is also the big day in the US when the Fed publishes the minutes from its July policy meeting, during which inflation and interest rates were top of the agenda.
As expected, the US central bank hiked rates by 0.75 percentage points for the second consecutive month, lifting its benchmark policy rate to a target range of 2.25-2.5%.
Powell used his press conference to tell journalists that the domestic economy was not in recession, and Fed may ease the pace of hikes soon: “At some point, it will be appropriate to slow down. We might do another unusually large increase, but that’s not a decision that we’ve made at all. We’re going to be guided by the data.”
Since the press conference, however, Fed Officials, including Mary Daly, president of the San Francisco Fed, and James Bullard, president of the St. Louis Fed, gave short shrift to the suggestion of dovishness.
The publication of the minutes from the Fed’s 26-27 July meeting could signal what pace US policymakers expect rates to run at in the future.
Looking ahead, US retail sales data will release on Wednesday. Having increased 1% in June, investors will keep a close eye on this gauge of consumer activity.