The pound finished the week rallying against the Dollar and the Euro finishing at 1.1723 against the Euro and 1.2808 against the Dollar. In the week the Pound Euro rate reached a 41-week high at 1.1716 and the Pound reached 1.2848 against the Dollar, which was the strongest level since April 2022.
The pound saw gains against the Dollar and the Euro as a there was an unexpected fall in the unemployment rate and a higher increase then expected in wages and job creation in the ONS labour market report for June. This showed that the UK labour market remains tight and therefore inflationary pressures continue to mount. This points to the Bank of England (BoE) needing to continue to increase interest rates to bring inflation down. This has led to the market predicting a further 130 basis points worth of hikes from the BoE in 2023 compared to only 60 basis points for the European Central bank (ECB) and 25 basis points for the Federal Reserve (Fed).
The Pounds rise against the Dollar was also attributed to the fact the Fed paused and didn’t increase interest rates last week combined with the with Jobless Claims increasing to 261k against market expectations. This increase in Jobless Claims led to indications that the US labour market is softening and therefore inflationary pressures reducing pointing to the possibility of less rate hikes in the future. However, it was a hawkish pause from the FED as they did indicate they would raise interest rates again.
The pounds gains against the Euro were capped due to the ECB hiking rates by 25 basis points and the aggressive tone surrounding future rate hikes. For example, Christine Lagarde the president of the ECB stated, “it is very likely the case that we will continue to raise rates in July.’
In the week ahead there is inflation data for the UK in the form of the Consumer Price Index and Core Consumer Price Index on Wednesday. If these readings show inflation is decreasing in the UK, then we could see the market dial back the basis point predictions and the value of the pound fall. On the other hand, if this data shows inflation is increasing then we could see the pound strengthen in anticipation of more rate hikes.
Furthermore, the BoE makes their interest rate decision on Thursday. This can in tangent with the inflation data cause fluctuations in the Pounds value depending on how aggressive the BoE are with their rate hike. The BoE are expected to increase by 25 basis points but It’s not just the interest rate decision that the markets will be focusing on but the tone of the BoE and indications of their future monetary policy towards further rate hikes.
There is further data for the UK on Friday in the form of retail sales data as well as PMI data that can give more indications to the strength of the UK economy, and therefore cause fluctuations in the exchange rate. There are also PMI readings for the Eurozone and for the US on Friday giving further indications into the strengths of those economies as well.
For the US there are several speeches from Fed members as well as the Fed chair Powell is testifying before congress providing an overview of the economy and monetary policy.
With data for the Eurozone, US and UK providing indications of the strength of each economy, all eyes will be on the inflation data on Wednesday and the interest rate decision for the UK on Thursday to give an idea of where the BoE will go with their monetary policy and how aggressive the BoE will be with future rate hikes.
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