resident Draghi mused about potential “reflationary forces” at work now that deflationary risks have all but disappeared, setting off fireworks in the Euro. The Bank of England Governor Carney joined his Chief Economist in making hawkish noises, suggesting that some monetary stimulus needed to be removed in the not too distant future. This had the predictable positive effect in the Pound.

In a sign that the ECB is watching recent Euro appreciation with some concern, ECB “sources” insisted that the market had misinterpreted Draghi’s comments the day after his speech. This stopped the Euro rally, but not before the common currency had risen over 2% in the week, dragging up in its wake all G10 currencies save the dollar and the Yen.

As political risks either fade into the background or have already been fully price into non dollar currencies, the driver in currency markets has shifted squarely back to central bank actions and the macroeconomic factors that drive them. Key market movers going forward will therefore be inflation-related indicators, with wage growth in the different currency areas taking on a particularly critical role.

Major currencies in detail

GBP

Governor Carney speech at the ECB’s Portugal forum provided strong support for our view that the market is (or at least, was, till last week) significantly underestimating the chance of Bank of England hikes in the fourth quarter of 2017. Given that 4 of 9 current MPC members are now on record stating that hikes are needed either now or soon, we think this may come as early as the first meeting after the summer holidays.

Next week focus will be on the PMI business activity indices, out Monday and Wednesday.

EUR

The events behind the Euro rally last week were somewhat strange. First, the euro reacted euphorically to President’s Draghi mention of reflationary dynamics in the Eurozone at its Portugal speech on Wednesday. Economic reality quickly put a damper on the move on Friday, as Eurozone annual inflation dropped to 1.3% on the year, from 1.4%. Core inflation (stripping out volatile food and energy components) did rise from 0.9% to 1.1%, but it remains stuck on its recent range and as far as ever from ECB targets.

This week, markets will probably be closely scrutinizing the minutes from the last ECB meeting, out Thursday morning.

USD

The main news out of the US last week was a modest upward revision to first quarter GDP growth, from 1.2 to 1.4%. Once this is adjusted for the effect of the large draw on business inventories, the US economy continues to growth at a modest but steady pace of 2% a year.

This trading week in the US is shortened by the Independence holiday on Tuesday, and little news is expect don the political front as Congress is off for the week. In addition to the always key payrolls report on Friday, expect some volatility around the publication of the FOMC minutes from the Fed last meeting on Wednesday evening.