Strong Employment data buoys the Pound

At the beginning of the week, the Pound (GBP) had a quiet start due to a lack of significant economic data. However, this changed quickly when robust employment data emerged, leading to a surge in the value of the Sterling as expectations of a rate hike increased.

The most recent labor market data revealed a record increase in wages, strengthening the argument for further tightening measures by the Bank of England (BoE). Despite an unexpected rise in unemployment, investors were buoyed by the stronger-than-anticipated wage growth figures.

Surprisingly, the latest GDP growth data showed a positive outcome, surpassing expectations even though the UK economy still contracted in June. Instead of the projected 0.3% decline, the contraction was only 0.1%. The economic impact of the King's Coronation, which included an additional bank holiday, was expected to dampen activity. However, the resilience of the service sector prevented a more significant downturn.

As the week progressed and economic data became scarce, GBP investors continued to express concerns about the uncertainty surrounding the UK economy, causing the Pound to slip. Despite the heightened expectations of a rate hike, worries persisted about the possibility of a recession and the cost-of-living crisis.

Looking ahead, the Pound Euro exchange rate could experience further volatility based on the release of the latest inflation data for the UK. Headline Consumer Price Index (CPI) is expected to decrease to 8.2%, indicating that inflation remains significantly high, well above the BoE's target rate of 2%. Core inflation is also predicted to moderately decrease to 7.1%. The potential for further tightening measures could strengthen the Pound or intensify concerns about economic instability, undermining confidence. On Friday, the latest retail sales data for the UK will be released, and if it shows a 0.2% decline as expected, it could further weaken the Pound.

For the US Dollar (USD), the publication of the latest US retail sales data for June on Tuesday will be noteworthy. A forecast of a 0.5% increase could boost USD investors' optimism, as it would indicate ongoing resilience in consumer spending.

However, the remainder of the week is expected to have limited impactful data releases. Consequently, the US Dollar could be susceptible to shifts in market sentiment and ongoing analysis of the Federal Reserve's tightening cycle.

If the market sentiment improves throughout the week, the safe-haven status of the US Dollar is unlikely to receive much support. Similarly, if the consensus remains that interest rate cuts are likely in the near future, the "Greenback" could face challenges.

Meanwhile, the Euro could experience further fluctuations if the final reading for Eurozone inflation diverges from the preliminary reading. A more substantial than expected cooling could lead to a significant reduction in rate hike expectations, potentially weakening the Euro.

EUR

Despite a shaky start, the Euro (EUR) gained momentum and demonstrated resilience throughout the week. Initially, the Euro was affected by a decline in investor confidence in Germany, which was reflected in the deteriorating ZEW economic sentiment, reaching its lowest level since December. Concerns regarding health issues in Europe's largest economy weighed on the Euro.

However, as the week progressed, the Euro benefited from its negative correlation with the US Dollar. The Euro rallied when inflation in the US softened more than anticipated, leading to significant losses for the US Dollar.

Nevertheless, the Euro's upward movement was limited by disappointing growth in the industrial production sector, as revealed by the latest data. Despite this, the Euro received additional support from the hawkish minutes of the recent European Central Bank (ECB) policy meeting. The minutes suggested expectations of further tightening measures, which buoyed Euro investors and helped sustain the currency's strength.

USD

Last week kicked off with the US Dollar (USD) gaining strength as investors sought its safe haven qualities. However, the initial gains were tempered by a pullback in US Treasury yields.

Throughout Tuesday, the market sentiment remained uncertain, and investors hesitated ahead of Wednesday's consumer price index (CPI) data, resulting in a lack of clear direction for the USD.

Subsequently, the US Dollar experienced a significant decline following the release of the latest inflation figures. The headline CPI showed a decrease from 4% to 3%, marking the lowest reading in over two years. Similarly, core inflation also cooled significantly, dropping from 5.3% to 4.8%.

This sharp decline in inflation prompted a substantial reduction in expectations for future rate hikes by the Federal Reserve, as the need for further tightening appeared to diminish.

The sell-off of the USD continued on Thursday, driven by another decline in the producer price index (PPI). As a result, the US Dollar reached its lowest point in 15 months.

However, on Friday, the struggling US Dollar managed to recover some of its losses. A combination of a muted market sentiment and the Michigan consumer sentiment index beating expectations brought a sense of optimism among consumers in July, which uplifted USD investors.

Data for the week ahead

Monday

02.00 CNY Gross Domestic Product

02.00 CNY Industtrial Production

02.00 CNY Retail Sales

08.15 EUR ECB's President Lagarde speech

Tuesday

01.30 AUD RBA Meeting Minutes

12.30 USD Retail Sales

12.30 CAD Consumer Price Index

22.45 NZD Consumer Price Index

Wednesday

06.00 GBP Consumer Price Index

Thursday

01.30 AUD Employment Change

01.30 AUD Unemployment Rate

Friday

06.00 GBP Retail Sales

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