Will the latest inflation figures help the Pound get stronger?

Last week was a more volatile one for the Pound as GBPEUR and GBPUSD saw 1 cent swings in their pairings, ending the week at 1.159 and 1.269 respectively. Sterling had been riding the recent highs off the back of their 14th consecutive rate hike in the week prior, and there were indications from the Bank of England that this may not be the end of the hike streak. There is currently an 85% chance of another 25 basis point hike at the meeting in September and, with an expectation of the terminal interest rate around 5.75%, we may see another beyond that.

On the other hand, the Euro has been surrounded with uncertainty in recent weeks, the main question being whether we can expect to see any more interest rate hikes out of the European Central Bank in coming months. Reuters released a poll last week which stated that 37 out of 70 economists expect the ECB to hold the deposit rate at 3.75% in September, an almost 50-50 split. The previous expectation of an interest rate hike in September sat at 35%, so it seems the market is edging towards the possibility of a rate hike after all. Eurozone inflation currently sits at 5.5% which is still well above the ECB’s target of 2%. Friday also saw France and Spain surprise markets with their Consumer Price Index figures which both increased slightly, and EURGBP reached a 3-week high of 0.8668 as a result.

Gross Domestic Product figures helped the Pound bounce back, however, as the data indicated the economy is still managing to maintain a better-than-expected pace, considering the dizzying heights on interest rates. GDP in Q2 grew by 0.2%, up from 0.1% in the last quarter, and 0.5% month-on-month, up from -0.1% in the previous month, with the UK avoiding recession by a wide mark.

This week will see the release of the UK’s CPI readings on Wednesday which will display whether interest rates have managed to decrease inflation closer to the desired levels. Inflation levels from the last readings released at 7.9%, down from 8.7%, and the Bank of England are confident we will see a decline towards the 2% target level by the end of this year. The Bank recently stated, “We expect it to fall further to around 5% by the end of this year… We expect inflation to keep on falling in 2024 and reach our 2% target by early 2025.” The expectation for this month’s reading will be a 1.1% drop to 6.8%, but the last 3 readings for UK CPI have seen the market surprised as the figure was not as low as expected.

Labour data will also be released for the UK on Tuesday including Average Earnings, expected to increase by 0.1%, and the Claimant Count Change, reading of the number of unemployed people within the UK. A positive day on Tuesday, a reading above expectations on Wednesday may see the Pound push back to recent highs above 1.17 as it will be more likely we will see another interest rate hike in September. GDP figures and Employment data will also be released for the Eurozone on Wednesday as the single currency tries to gain back its recent losses.

The US Dollar underwhelmed with last week’s CPI reading which saw inflation drop to 4.7% from 4.8%. Following on from the Nonfarm payrolls release in the week prior which also underwhelmed the market, the most recent surveys show a 15% chance on an interest rate hike from the Federal Open Market Committee in September. Tuesday’s release of Retail Sales figures are tipped to increase by 0.2% in the US which may help USD gain some value to start the week off, followed by the FOMC minutes which will give us more of an indication of where monetary policy will be headed in the months to come.