Developments surrounding bond yields will continue to be the most important factor affecting currencies during the week.

The US Federal Reserve is likely to maintain its gradual approach to raising interest rates. The most important element will be whether the ECB and other main global central banks signal that they are preparing to raise interest rates.  

Overall, the Euro is likely to maintain a firm tone, but it will be difficult to make further strong headway in the short term. Sterling is unlikely to make much headway given weak economic data releases.

US

The most important release will be the consumer prices (CPI) data on Friday. The Federal Reserve has increased interest rates twice during 2017 and expects to increase rates once more this year.

If inflation is weak, however, the Fed will find it more difficult to justify higher interest rates while evidence of higher inflation would push the central bank towards further rate increases.

The CPI data will, therefore, have important implications for US interest rates and the dollar.

The latest retail sales data will be released at the same time as the CPI data.  

Federal Reserve Chair Yellen will testify to Congress on Wednesday and Thursday with markets looking for any further hints on interest rates.

UK

The only major economic data release is the labour-market report and the main focus will be on average earnings. While earnings growth remains weak, the Bank of England will be reluctant to increase interest, in opposed to Bank of England Chief Economist Haldane, who expected Interest rates to rise. However, any evidence that earnings growth is becoming stronger would tend to push the bank towards an interest rate hike and a move at the August meeting should not be excluded.

Political factors will continue to be important with further speculation surrounding Brexit talks and tensions in the Conservative Party. The potential for transitional arrangements could be the most important aspect and would tend to provide net Sterling support.

Euro-zone

The Euro-zone economic data is unlikely to have a major impact during the week with most attention again focussed on the potential ECB policies with the next central bank meeting due the following week.

ECB members are likely to remain cautious surrounding the outlook, especially after the comments from ECB President Draghi a few weeks ago which triggered a sharp Euro gains

International

The Bank of Canada monetary policy meeting will be a very important focus on Wednesday. The central bank is now much more optimistic surrounding the outlook and confident that the interest rate cuts seen in early 2015 have done their job. The bank will, therefore, move closer to raising interest rates with markets seeing the chances of a rate hike as above 50%.

The Canadian dollar will strengthen immediately if rates are increased while a decision not to raise rates would tend to weaken the currency.

Forecasts

Proposed reading:

• More recent news
• 2017 Economic Calendar
• Today’s Foreign Exchange Rates

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