The central bank monetary policy decisions continue into another week. However, this time around it is quite likely that there will not be any surprises. On the agenda this week, the Swiss National Bank will be meeting for its quarterly monetary policy review. This is later followed by the Bank of England’s monetary policy decision on Thursday.
Both the central banks are expected to hold interest rates steady and likely to stick to the old narrative. Compared to the BoC and the ECB meetings last week, the SNB and the BoE meetings are likely to be a non-event.
On the economic front, the focus turns to inflation and retail sales reports from the United States. Headline inflation is expected to accelerate in August which could offer some relief for the US dollar which continues to slip against its peers.
Overall, the week ahead is likely to be quiet. Here is a brief recap on what to expect from the currency markets in the week ahead.
UK: Inflation, Wages to decide the BoE’s forward guidance
While the economic calendar is light across most of the G7 currencies, it is going to be a big week for the British pound. Starting the week on Tuesday, the UK’s Office for National Statistics (ONS) will be releasing the monthly inflation figures.
According to the economists polled, it is estimated that UK’s consumer prices might have accelerated 2.8% in August. Just a month before, consumer prices remained stable at 2.6%. Even if inflation accelerates to 2.8%, it is still lower than the 2.9% inflation rate that was seen in May this year. Core inflation rate is also expected to pick up, rising 2.5%.
On Wednesday, the monthly jobs data will be coming out with investors focusing on wage growth. The UK’s unemployment rate fell to 4.4% in July and marked the lowest levels since 1975. Wage growth for August is expected to rise 2.3%, accelerating from 2.1% in the three months to July on the year.
Following these two key data points, on Thursday the Bank of England will be holding its monetary policy meeting. No changes are expected to the interest rates, and officials are likely to issue forward guidance taking into consideration the latest inflation and wage growth data points.
The British pound rose to $1.3200 last week, mostly on account of a weaker US dollar. Economic indicators continued to remain mixed. The manufacturing sector in the UK remains the bright spot with both construction and services PMI slipping. Last week also showed that manufacturing output increased while construction and industrial production remained subdued or weak.
Given the hawkish forecasts on inflation and wages, a beat on the estimates could potentially help the BoE to turn hawkish in its forward guidance as well. This potentially exposes the downside risks in the British pound, especially against the US dollar.
US inflation rate expected to accelerate in August
The week ahead is relatively quiet from the US with the exception of inflation and retail sales data. Both these data points are likely to influence the market expectations in regards to the next rate hike from the Fed.
Last week, a number of Fed officials spoke, and the common underlying theme was that the Fed would remain patient on inflation before hiking interest rates.
In this aspect, the monthly inflation data comes into focus. According to the median estimates, forecasts show that consumer prices have increased in August.
On a month over month basis, headline CPI is expected to rise 0.3%, pushing the year over year inflation rate slightly higher to 1.8%. This would put a smile on the Fed which has struggled to push inflation higher. Core inflation rate is however expected to remain slightly weaker.
On Friday, the monthly retail sales figures are expected to show that US consumers spent less. Headline retail sales are forecast to rise just 0.1% after rising 0.6% in July.
The increase in July marked the first positive reading as retail sales fell for two consecutive months. Retail sales that exclude autos are however forecast to rise 0.5% on the month, rising at the same pace as the month before.