n the EUR/USD cross, the recent range of 1.11 to 1.13 was respected. Even Sterling failed to move much in response to a rather hawkish speech by the former dove Chief Economist Haldane, who contradicted Governor Carney in rather blunt terms by arguing that a hike was needed “relatively soon”.

Outside the G10 currencies, the biggest mover was the Russian Ruble which slid by over 3% against the US Dollar as oil prices continue to fall and the Central Bank of Russia cheers in the sidelines.

The critical drivers for currency markets have shifted from activity and employment news to inflation and wages. It is clear that central banks will remove accommodation if and only if inflation shows clear signs of sustained increases towards their targets. Therefore, this Friday should be an unusually volatile day for currency markets as we get the Eurozone flash inflation print in the morning and then the US personal consumption expenditure deflator (PCE) in the afternoon.

Major currencies in detail

GBP

Our forecast for an earlier-than-expected hike from the Bank of England, likely before the end of 2017, received a significant boost from Chief Economist Haldane. By stating that “partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon”, he put himself squarely on the side of the MPC hawks. This means there will be likely at least three votes for a hike in the next Bank meeting, with markets starting to brace for an Autumn hike. However, the probability of a September hike according to interest rate markets is still considerably less than 30%, which we do not think reflects the reality of near 3% inflation.

The Pound remains stable for now, pulled in opposite directions by the rising chance of an early hike on one hand, and the uncertainty of the political backdrop and Brexit negotiations on the other.

EUR

The main data out last week, the PMI indices of business activity, showed a pullback from record highs, but are still consistent with Eurozone-wide growth above 2%.

As we mentioned above, however, growth is taking a back seat to inflation as the main policy driver for central banks. With the Eurozone now showing reasonable levels of economic activity, the key decision of when and how fast to remove monetary accommodation is dependent on the speed at which inflation rises towards the ECB’s target. This Friday’s flash inflation data therefore looms as the most critical event for the Euro over the next few weeks.

USD

The economic calendar out of the US was quite empty last week. However, the housing data that did come out was mostly stronger-than-expected, with both existing and new home sales outperforming market consensus.

This week will be dominated by the release of personal consumption expenditure data on Friday, in particular the deflator. This latter one is the Federal Reserve’s preferred measure of inflationary pressures in the US economy. With the consensus expecting a sharp drop from 1.7% to 1.5% or lower, any positive surprise could be very positive for US rates and the Dollar.