This week sees the UK release a lot of important data that could have a direct effect on when UK interest rates will next be increased and where they will eventually peak. After last week’s almost inexplicable GDP data for June/Q2, which showed manufacturing output surging by the most it has on a monthly basis (outside of the pandemic) since January 2020, this week could point to much weaker activity, and crucially further reductions in the pace of inflation. If there are signs of this, then the markets could further reduce UK interest rate hike expectations, perhaps even reducing the probability that the Bank of England will hike for a 15th consecutive time in September (currently the market thinks the odds are overwhelmingly in favour of another hike). I think that the signs of deflation at a producer level will persist and perhaps intensify, suggesting that the downside risks in consumer price inflation will grow in the coming months and quarters.

Meanwhile, whilst attention might predominantly by on the raft of UK data releases, this week also sees: July US retail sales and industrial production figures on Tuesday and Wednesday, the German ZEW survey for August on Tuesday, Euroland Q2 GDP figures (revised) and June industrial production data on Wednesday. Here also these figures might provide some greater insight into what is happening in both the US and Euroland economies and as such prompt further debate around whether additional interest rate hikes are necessary. For the US, unless there are signs that the economy is overheating more than already observed, there is little chance of a shift to a higher peak, or a longer period before rate cuts ensue. For the Euroland economy, weakness in the survey data and signs of problems in manufacturing activity hasn’t yet translated into a significant shift in market expectations of Euroland interest rates. The market still prices a healthy risk of a September or October hike, neither of which I see as likely.  

For the FX markets, this week could make a difference in terms of which way the US dollar is heading. I don’t think the UK or Euroland data will be particularly supportive of either the GBP or EUR, but it hasn’t been the UK or Euroland fundamental data driving FX markets recently in any case, in my view. We have seen a raft of issues spring up in recent days relating to both China and Russia, with both currencies reacting negatively, the ruble much more so that the renminbi. Concerns over the Chinese property market adds to the rising incidence of missed corporate bond payments and Chinese businesses getting into trouble. In Russia, despite the economy returning to growth, there are worries that inflation is rising once again, sanctions continuing to exert pressure on the supply of both necessity and discretionary goods. Political tensions are also reported on the rise, with Russia unable to make headway in its war against Ukraine. There has also been weakness in the South African rand. 

Could we see the EUR and GBP under pressure as the USD makes further headway? After months of trying higher and failing to hold onto those fresh highs, is it time for the likes of EURUSD and GBPUSD to pull back and test fresh lows? For the time being at lest we are still in ranges between $1.0840 - 1.1140 and $1.26 – 1.31 in EURUSD and GBPUSD respectively, but the downside of those ranges could break, moving renewed tests higher further out of reach. If the pressure on emerging markets persists, that could provide sufficient momentum in the USD index to break higher, especially if this is driven by rising political and economic uncertainty in other superpowers, in my opinion.

The only major central bank this week that is expected to raise interest rates is the Norges Bank. The Norwegian central bank decision is unanimously expected to be a 25-basis point hike, but there could be an acknowledgement from the central bank that this concludes its hiking cycle. With other central banks such as the Reserve Bank of New Zealand and Philippines central bank expected to keep interest rates on hold, most of the developed and developing world is, in my view, at the very end of the tightening cycle. What might that mean for these countries’ currencies, especially in the face of a possibly resurgent US dollar?