It’s likely to be a busy week for the pound as there are a number of important releases and the politicians return from summer holidays.

Brexit

Back to school: Theresa May is back from holiday and the term starts in earnest with plenty of Brexit homework to be handed in. The prime minister is expected to clarify the government’s positions on a range of key issues with the publication of various position papers on things like customs arrangements and the Irish border. Michel Barnier will be marking the work and we can expect him to get his red pen out.

After two rounds of talks where Britain seems to be scant with any detail, the EU – and markets – will be looking for progress. The papers are due by August 21st ahead of the third round of talks on August 28th. The clock is ticking.

Inflation, wages & retail sales

UK inflation data is the main release for cable this week as traders look for any clues about when the Bank of England will raise rates.

Price growth is expected to accelerate again after the surprise slowdown in June. CPI inflation retreated to 2.6% in June from 2.9% in May, effectively killing off any chance of a rate hike in the summer. Core inflation, which strips out volatile food and energy prices, fell back to 2.4% from 2.6% in May. 

Inflation is expected to have ticked up to 2.7% in July, although falling oil prices and the end of mobile roaming charges in the EU may act as a counterbalance to rising prices. The Bank of England expects inflation will reach a peak of 3% in October before the pressure lifts.

As inflation took off earlier this year, stagnant pay left real earning turning negative. Growth in average earnings is expected to remain lacklustre.

Geopolitical risk

Since last Thursday, GBPUSD has eased back more than 2% as risk-off mood stoked by tensions in Korea left investors favouring the dollar over sterling. With stocks rising on Monday as fears about an impending hot war diminish there is evidence that risk appetite is returning, which could offer some support for the pound.

FOMC minutes

Impossible to ignore. The FOMC noted at its last meeting are ‘monitoring inflation developments closely’, which may have been a signal that policymakers are no longer convinced that the strong labour market is enough to get inflation to its target rate. Indeed in June the Fed lowered the inflation outlook whilst raising its employment estimate, admitting that it will take more than a run of bumper nonfarm payrolls to get rates rising any faster. All the latest inflation figures remain lacklustre – CPI rose just 0.1% in July. The minutes will put all the data in context and should signal whether markets to price in a 40% chance of another hike this year.

 

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