GBP

Sterling was close to yearly highs against the euro last week following Thursday’s Bank of England (BoE) policy meeting. 

While no policy changes were announced, the bank’s Monetary Policy Committee (MPC) acknowledged the need to ease monetary policy sooner than anticipated. This is in order to bring inflation back to 2%, the BoE’s target, over the next few years. This was the first acknowledgement a change would be needed and that recent inflation isn’t purely transitory. The MPC is now planning two interest rates hikes in 2022, two years earlier than expected.

All this means the BoE could be the first central bank to adjust monetary policy and hike interest rates. If this does happen, we could see further gains for sterling in the months to come. 

With no headline data out for a few days, the recent gains could drop off in the run up to Thursday’s GDP reading. With a previous reading of -1.6 and consensus of 4.8, investors will be looking for a positive reading to help sterling to build on last week’s gains. 

USD

The highly anticipated Non Farm Payrolls (NFP) were released last week and it was mostly good news for the dollar. NFP rose by 943,000 in July, beating expectations of 845,000. This was the largest Increase in the past 11 months. Unemployment dropped to 5.4% from 5.9%, whilst average earnings increased by 4% from 3.8%. 

Focus now switches to the US Federal Reserve and how they digest the data. Recently, the Fed have been reluctant to adjust monetary policy, deeming any rise in inflation as transitory. One of the key parameters for them to even look at adjusting policy was full employment.

While they’re not at that point, the NFP data was a significant step in the right direction and should start the conversation again. As a result, the dollar has already made gains against all the major currencies.

Wednesday’s Consumer Price Index data and Thursday’s Producer Price Index will be the next headline releases for the dollar. Any reduction on previous readings will feed into the Fed’s narrative that current inflation levels are transitory. 

Key announcements

None