US inflation for July came out exactly as expected last week - other than that, there was little news elsewhere to move markets.
Stocks, bonds and the dollar all closed on Friday almost exactly where they had opened on Monday, in a typical week of slow summer trading. The war in Iran seems to be settling into a long-term context of economic resilience between the US and Iran, and is for now providing few market moving headlines. Federal Reserve officials are keeping their cards close to the chest regarding the upcoming September meeting, and an ECB hike next month seems certain. The big mover of the week was the Brazilian real, which was caught in the sell off of Brazilian assets on concerns about a left-wing victory in the upcoming presidential elections.
This week is also shaping up to be a quiet one in markets. The main event will be the release of the August Purchasing Managers' Index (PMI) data on Friday. This will be of particular importance in the Eurozone, due to the lagged nature of hard economic data there. A spate of UK June/July labour reports on Tuesday and the inflation numbers there on Wednesday will be key for sterling. The minutes of the last Fed meeting released this Wednesday could also attract more attention than usual given the US central bank's turn toward fewer communications and less forward guidance.
GBP
Quarterly and monthly GDP data from the UK confirmed that the economy was growing at a decent pace of about 1.5% a year around the time Andy Burnham took over as prime minister. It will be interesting to see if the momentum carries out to the third quarter of 2026, where his premiership can start either taking the credit or the blame for the evolution of the economy.
This week's inflation and labour market numbers will be key for the Bank of England to decide whether to raise rates in 2026. We are still expecting them to warrant a cautious approach to monetary policy tightening, and the market seems to be slowly converging to our view. We expect the core inflation subindex to continue moving towards the central bank target and post a small drop to 2.5% on an annual basis.
EUR
Positive economic momentum in the second quarter, as well as stubborn inflationary pressures (which may be worsened by the low Rhine levels and their impact on transportation costs) mean markets are pricing near certainty of another ECB hike at its September meeting. We do not disagree with this view, and think that a rate increase will come whether we see a peace deal in Iran or not. This is one of the reasons we continue to forecast a gentle rally in the euro into 2027.
A healthy PMI release consistent with steady growth, and a second-quarter negotiated wage release that is expected to show another increase should further validate our views if confirmed this week. Should the Fed hold rates for an extended period while the ECB tightens, the resulting narrowing in rate differentials across the Atlantic would likely amplify these gains in EUR/USD.
USD
Both demand and pricing pressures in the US seem to be moderating. Monthly core inflation prints have averaged about 0.2% since the war started, consistent with an annualized level of just above 2% and showing little sign of spillover from higher energy prices. While we do not fully trust the labour market surveys, hard data like retail sales seems to confirm the moderating path of demand.
Just one labour market and one inflation report remain before the Federal Reserve’s September meeting. We think it is unlikely that the numbers will surprise enough to the upside to allow the hawks to force a rate increase, and we are comfortable with our call of no change through year end. A combination of a cautious Fed and a peace deal that reopens the Strait of Hormuz should, we think, keep the dollar on the back foot in the coming months.
