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Inflation & PMI data the key events this week

The Pound faces a heavy data-week.. 



Key readings out of the UK this week will set up what the BoE decides to do with interest rates next month. All releases are important and we believe the forecast on all of them looks about right. The main number economists will want to see is of course the inflation one and this is expected to come down into single figures.

If this happens (and I guess by how much plays a part here too) it will likely weaken the Pound. This is because it will highlight that high interest rates are curbing high inflation. Therefore, continuing to hike them further will not be required for much longer if at all. Interest rates have been the biggest market mover in the industry for nearly a year now and the general rule is; the higher the interest rate, the higher the currency.

Sterling slipped last week from an 11-month high versus the US Dollar and a near 4-month high versus the Euro, after a strong recent run across the board. There is no surprise to us to see its value fall after trading in out-performance territory for so long. It looks like a further drop is on the cards near-term, but longer term things are looking much brighter. This has today been further reflected in the UK investor confidence score which sees the highest number since before Russia's invasion of Ukraine.

As expected, it was a strong week for the single currency last time out, gaining nearly 1% across the board whilst releasing no economic data of its own. Confidence and PMI data is being delivered this time round which may dent the hopes of a further recovery. However, this is unlikely to happen versus Sterling because of the aforementioned UK data being more prominent. 

Because the ECB is expected to raise interest rates further than the BoE, the Euro will get stronger versus the Pound. Longer term though, this will end up working the other way, as economic performance and jobs numbers will soon come under pressure. We are a few months off from this happening yet, which is why the £-€ rate is limited on the upside currently. 

It's a very quiet data week on the market for the US with only the PMI's to go on. Therefore its currency will be moved by events elsewhere including Chinese GDP and earnings week on Wall Street. A retreat from the £-$ rate last Friday, may be a sign of things to come this week..