GBP

UK GDP growth for May was a bit on the soft side, but markets did not react much to this lagging data point. More timely was the decision to press with reopening measures 19th July, despite sharply rising new virus cases, which bodes well for sterling in the coming months.

This week, we will be paying close attention to the inflation report on Wednesday. An upward surprise could bring into focus the possibility of an earlier than expected tightening of monetary policy, which would be positive for the pound.

EUR

Revisions to the preliminary June PMIs mostly reinforced our optimistic view of the European economic recovery. Another important development was the strategic review of ECB policy, which now claims to have a symmetrical inflation target around 2%. What this entails for practical policy making remains to be fleshed out, however, and the announcement had little market impact.

There is little of note in the calendar this week, so expect the euro to trade off events in the US, particularly inflation for June and Fed Chair Powell’s testimony to Congress.

USD

The sharp moves in the Treasury market dominated headlines in a week with little market-moving data. The recovery in yields in the latter half of the week suggests that the moves had more to do with positioning squaring and short covering than a fundamental rethink of the macroeconomic outlook.

All eyes will now be on the inflation report on Tuesday. Economists are not expecting any significant let up in inflationary pressures that have resulted in the highest inflation levels in decades yet. We see an increasing disconnect between the reality of inflation prints and the very low rates availing in government debt throughout the developed world.

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