Sterling in view ahead of key data points

With a host of economic data due out from the UK this week, what should we look out for, and how could it affect the pound?

Source: Bloomberg

The UK economy comes into focus this week, with a plethora of tier one economic data points providing a likely pickup in volatility for the pound. With less than three weeks until we see the Bank of England (BoE) return to the stand, these data points will be crucial for market expectations. Those expectations currently point towards a 90% chance that the Monetary Policy Committee (MPC) will rate rates for the first time since November 2017.

While the tone from the BoE has largely pointed towards a strong chance that the committee will act in August, Friday saw Deputy Governor Jon Cunliffe lay out a more cautious outlook. He saw limited evidence that wage growth is as strong as had previously been predicted. This provides added interest in tomorrow’s jobs data, with sterling bulls hoping to see average earnings reverse the decline that has seen a fall from 2.8% to 2.5% in the space of two months.

While Tuesday will no doubt see markets focus in on the jobs data (and particularly wages), Wednesday sees heads turn towards inflation data, with consumer price index (CPI) predicted to rise from 2.4% to 2.6%. This would be a significant shift in trend, given the decline in both headline and core inflation throughout 2018 thus far. Of course, with the BoE largely dictated by the core mandate of maintaining price stability, such a rise in inflation could drive greater rate hike expectations from the markets, driving the pound higher.

Bank of England meeting

An in-depth look at the Bank of England’s MPC
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With markets heavily geared towards a rate hike next month, it is worth bearing in mind that the main risk is for a weaker pound in the event of a less hawkish meeting from the committee. A decision to hold off on their rate rise could spark a weakening for the pound.

Looking at EUR/GBP, we have been trading within a descending channel for the past ten months. A standard-deviation channel has been applied here to provide a rough idea of where we could see the market reverse once again, rather than the absolute extremes of the channel.

With the price having turned lower from the 76.4% retracement, there is reason to believe that we could see a move lower in the coming days (data permitting). Watch for a break and close below £0.8797 as a strong bearish sell signal, where we would be looking for a move back towards the lower bounds of this descending channel.

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