Euro drops ahead of key inflation prints
Daily Currency Update
The August meeting of the Bank of England was unhelpful to the pound. The MPC opted for a small interest rate hike of 25 basis points, in line with our expectations, albeit there were three dissents, with two members favouring a 50bp hike and one voting in favour of no change. The guidance in the statement was unaltered from the previous meeting, hinting that more hikes may be needed should inflation be ‘persistent’. That said, there is now a general consensus that the end to hikes may not be too far away, with the MPC stating that rates are already at ‘restrictive’ levels.The pound is suffering as market expectations for the terminal rate recede from the 6% level. However, the BoE has also suggested that rates will stay elevated for a long time. Given that the terminal rate is likely the highest among G10 countries, we remain optimistic about sterling. This week, the GDP growth report out on Friday will give a lagged read on the health of the UK economy.
Key Movers
The ECB received mixed news from the second-quarter GDP and July flash inflation reports. The former showed that the economy emerged from a technical recession in the three months to the end of June, albeit growth is at low levels. Meanwhile, the latter showed no signs of a disinflation trend, which modestly beat expectations and remains just shy of record highs.The euro remains dependent on European Central Bank policy, which itself is now dependent on future economic data. Stubbornly high core inflation in the Eurozone will be resolved, although we think that the quarterly wage report out of Germany later in the month, followed by the Euro Area data in mid-September, will be important here.
Any signs of a further acceleration in earnings could raise concerns over a wage-price spiral, and support bets in favour of additional ECB policy tightening.
Expected Ranges
- GBP/USD: 1.27382 - 1.27850 ▲
- GBP/EUR: 1.15953 - 1.16222 ▲
- GBP/AUD: 1.94399 - 1.95601 ▲
- EUR/USD: 1.09737 - 1.10111 ▲