It’s a data-heavy week for the UK, with investors turning to Wednesday’s CPI readings and Friday’s retail sales numbers (all due at 06:00 GMT) after today’s employment report. The key monthly metrics for the British economy are not anticipated to bring anything new to the table as far as the Bank of England policy outlook or the pound are concerned. However, they may determine how well sterling stacks up against its peers in the short term, some of which have had a few wobbles lately, including the mighty US dollar.
UK CPI may fall back, but only temporarily
The UK isn’t quite experiencing runaway inflation like in the United States, but the Bank of England is already nervous that its forecasters are predicting the consumer price index will hit 4% later this year. In June, the annual rate of CPI stood at 2.5% – above the Bank’s 2% target. It is expected to have moderated slightly to 2.3% in July before potentially picking up again. The core rate is also forecast to have eased back a little in July to 2.2% from 2.3%.
But with factory input prices running around 10% over the past three months and likely holding near that region in July, it’s only a matter of time before more of that cost burden is passed onto consumers. Moreover, while some of the price pressures from pent-up demand will probably subside over the coming months, it’s difficult to see supply-side inflation abating as quickly because the global supply shortages and bottlenecks could last well into 2022 if not beyond.
Can retail sales maintain growth momentum?
Consequently, policymakers at the BoE are not beating around the bush like their Fed counterparts and laid out an exit strategy from their quantitative easing programme at the August meeting. However, the timing of the first post-pandemic rate hike is still open to debate and subject to how quickly the economy recovers from the devastating lockdowns.
Retail sales figures out on Friday are expected to show the reopening effect fading further in July. The month-on-month increase is forecast at 0.4%, slightly down on the prior 0.5% rate, while annual growth is projected to slow from 9.7% in June to 6.0% in July. Given the expected boost from England reaching the UEFA Euro 2020 final as well as the good weather, there is a greater risk of an upside surprise to the data. The question is, how much of a lift would stronger-than-expected prints offer the pound? 
Cable might have peaked but euro/pound still bearish
Against the US dollar, sterling has been stuck in a neutral range for much of the summer, drifting towards $1.38, amid relatively strong recoveries and tapering expectations on both sides of the Atlantic. However, a hat trick of positive releases this week following the robust jobs data could be more impactful for euro/pound.
The pair recently brushed a 17-year trough of 0.8448. It has since edged up to around 0.85. But with the 50-day moving average fast closing in on it, it’s hard to see the euro finding much upside in the near term when the policy divergence between the BoE and ECB isn’t about to lessen anytime soon.
As long as there’s nothing that derails the UK economy, euro/pound could soon be testing the 123.6% Fibonacci extension of the April upleg at 0.8411 before sellers set their sights on the 161.8% Fibonacci of 0.8316.
Inflation less of a problem for ECB than BoE
Although Eurozone data hasn’t necessarily been worse than Britain’s recently and the EU’s vaccination rate could even overtake the UK’s soon, underlying inflation in the euro area remains very much depressed while UK manufacturers have additionally had to contend with Brexit-driven costs, reinforcing the monetary policy divergence. So although the pound’s rally versus the dollar has possibly run its course, there may be plenty of steam left against the euro, with the 0.83 level looking like a reachable target.
