n preparation for this week’s meeting, ECB officials leaked their unhappiness with the pace of appreciation, which has taken the common currency to three-year highs in trade-weighted terms. These reports knocked the Euro down from the highs it reached on Tuesday above the psychological 1.20 level. The weakish US labour market report was not enough to stop the sell-off, and the common currency ended the week nearly 1.5% off its heights in trade-weighted terms.

Sterling was the biggest beneficiary from the countertrend move, buoyed by Euro weakness and strong UK manufacturing data.

FX trading this week will be dominated by the key risk event on Thursday, the ECB meeting. Most analysts now expect the decision to extend QE to be deferred into October or December, which could pressure the Euro downwards.

Major currencies in detail

GBP

There was no improvement in the news flow regarding Brexit negotiations. However, current Sterling levels at all-time lows in trade weighted terms are pricing in something close to a worst-case scenario. Markets appear to agree that the move has been excessive.

A positive print in manufacturing business activity, together with reports of ECB concerns about Euro strength, was enough to send Sterling to its best weekly performance in months.

EUR

Inflation data from the Eurozone as a whole confirms our view that economic strength is exerting little upward pressure on inflation, which remains far below the ECB’s forecasts and target of “close to, but below 2%”. The rapid rise in the Euro will only reinforce these concerns. Consensus for this week’s key ECB meeting is mostly ruling out a tapering announcement. In fact, ECB sources on Friday indicated that it will be delayed until December rather than October.

However, the key discussions on Thursday will take place around projections for inflation. We expect to see a meaningful downward revision of the ECB staff forecasts for inflation, and it is quite likely that these revisions will be explicitly blamed on currency strength both in the report and President Draghi’s press conference. Risks to the Euro around this meeting are skewed to the downside in our view.

USD

Weakness in last Friday’s payroll report will certainly give some ammunition to doves in the Federal Reserve that wish to delay further interest rate hikes until 2018. The headline number of net job creation in the US came in somewhat below expectations, though at a still healthy pace of 156,000 per month. Other details were also a bit below expectations, including hourly wage growth (2.5%) and unemployment (ticked up to 4.4%).

However, currency markets largely ignored the release and paid more attention to reports of forward movement on US tax cuts as well as the reports of concern from ECB officials about Euro strength.