Will we continue to see the Pound gain strength against the Dollar on the back of strong PMI data or will we see the Euro and Dollar gain strength amidst further rate hike bets?

Last week saw Sterling gain ground on the Euro and the Dollar. With the Pound ending the week at 1.1711 against the Euro and 1.2738 against the Dollar.

The Pound saw strength as although the consumer price index dropped from 7.9% to 6.8% core inflation which strips out all the volatile items that affect inflation increased from 6.8% to 6.9% thus showing inflation is still embedded in the economy. This poses the question of how aggressive will the Bank of England (BoE) need to be with future rate hikes? The Pound did retreat on Friday due to a higher than expected fall in retail sales with retail sales falling to -1.2% month on month compared with an expected drop of -0.5% and Falling to -1.4% year on year against an expected -0.7%. However, theses losses were largely recovered as the sentiment was that this slump in retail sales was due to poor weather in the UK.

The data from the Eurozone did little to prevent the Pounds gains as GDP data from the Eurozone showed the Eurozone grew very little in the last quarter. On top of this there was continued uncertainty over future rate hikes in the ECB. The inflation data from the Eurozone on Friday in the form of the Core Harmonized Index of Consumer Prices did little to help this uncertainty as came out as expected at 5.5% which was no change from the previous reading.

The Pound gained ground against the Dollar in the week however these gains were capped due to strong US data and the Federal Reserve (Fed) meeting minutes opening the question around future rate hikes for the Fed. Minutes from the Feds July policy meeting showed a divide among members of the Fed about whether to increase interest rates. The strong data came in the form of retail sales which increased more than expected from an expected 0.4% increase month on month to a 0.7% increase.

On Wednesday we will see composite, manufacturing and services PMI data for the US, UK and Eurozone. For each of these PMI readings a value over 50 will show an expansion in these sectors and a value below 50 will show a contraction. This data could provide more indications of whether each respective central bank can afford to increase interest rates and how aggressive they can be with this.

There is further data for Germany, the powerhouse of Europe in the form of a Producer Price Index on Monday and Gross Domestic Product (GDP) on Friday. As Germany is the largest economy in the Eurozone, data for Germany gives indications of how the larger Eurozone is fairing. Therefore, the Producer Price Index will provide further indications into inflation in the Eurozone and the GDP data will provide further indications into the strengths of the Eurozone economy.

For the Dollar on top of the PMI data there are several speeches from Fed members on Tuesday as well as speech by the Feds chair Powell on Friday. On Thursday in the US there is Durable goods orders and initial jobless claims. Durable Goods Orders shows the state of the US production activity and initial jobless claims measure the strength in the labour market. On top of this The Jackson Hole Economic Policy Symposium which is an annal symposium where central bankers, policy experts and academics come together to focus on a topic every year takes place on Thursday and Friday. This shows there is a rich tapestry of data coming out of the US this week that could give further indication as to whether the Fed will hike rates in the future.