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UK set for a blockbuster week of data

Inflation, labour market, output and retail sales data are due throughout the week, but I don’t think the outcome will alter much for the UK. Instead, the data is likely to support the Bank of England’s (BoE) cautious tone and our UK economics team forecasts that the BoE will hold interest rates in September.

The team also thinks that the Consumer Price Index (CPI) will tick up to 2.1% year on year in July from 2% in June, while the Bloomberg consensus forecast is at 2.3%. Nevertheless, a realisation of either forecast would mark the first increase in inflation since December 2023.

Can US data settle the 25bp vs 50bp debate?

According to interest rate futures markets and economist survey by Bloomberg, September is almost unanimously expected to mark the start of the Federal Reserve’s rate cutting cycle. But will this start at 25 basis points (bp) or 50bp? NatWest US economists are firmly in the 50bp camp.

But this week’s CPI release may not be strong enough or weak enough to settle that debate once and for all. In line with the Bloomberg consensus forecasts, our US economics team expects CPI to bounce back relative to last month’s very low print, rising 0.2% month over month.

The Fed’s decision on when and how much to cut will be as much about growth as it is about inflation, so we’ll be closely watching retail sales data on Thursday. Further evidence of a slowdown in economic growth combined with an uptick in unemployment may tip the balance in favour of a 50bp rate cut in September. The state and local employment report on Friday may get additional scrutiny as markets are keenly looking out for signs of slowing in the labour market.

A sharp dovish turn by the Fed and continued slowdown in the US economy may strip the USD of prior support – its relative yield advantage and the exceptional nature of US economic growth.

Euro area output likely to be the focus

It’s a light euro area (EA) data calendar, but we do get EA industrial production, EA provisional Q2 output and employment growth.

 In my opinion, the euro area’s economic recovery remains fragile, amid renewed headwinds to growth signalled by business surveys. For euro area output, I’ll be watching how closely the weak survey data correlates with official output data. 

 

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