Are inflation fears easing? Dovish turn in monetary policy in the UK

The EUR/USD rate fell below 1,12 and then rose again and is currently drifting above this level. Volatility is limited except for the pound, which has lost heavily due to an inflation surprise. Today, the macro calendar contains data of the second caliber, which may not break the quotes of the major currency pair out of a tight fluctuation range.

The pound was hit hard

After last week's US inflation data, the market began to expect the Fed to be more lenient in its actions and ends the cycle of interest rate hikes earlier. It is speculated that this will be the July increase recent increase in the cost of money and after this date we will be approaching the first reduction.

A dovish turn in monetary policy is becoming increasingly likely in the UK. At least the market started to believe it after yesterday's inflation surprises from Great Britain. Core indicator fell to its lowest level in 15 months and amounted to 7,9 percent. Also the base surprised with a lower value. The pound suffered as data fueled expectations that Bank of England (BoE) may slow down the pace of monetary policy tightening. The OIS market is still pricing in a 36bps rate hike in August and a total of 86bps by the end of the year.

The GBP/PLN exchange rate fell to around 1,29 and the nearest technical support is around 1,2830. The weakness of the pound caused that in relation to PLN was the weakest since February 2021.

For the RBA, this is secondary data

We must note that the picture of inflation and central banks is not homogeneous. In the area of ​​raw materials, Canada has taken note higher than expected headline inflation, but continued pressure on core prices suggests that it is too early to rule out further tightening by Bank of Canada. In New Zealand, headline inflation exceeded consensus and the core measure remained unchanged at 5,8%. from the first to the second quarter.

In Australia, the publication of overnight employment data in June caused the AUD to appreciate. Employment increased by 32,6 thousand. against the consensus of 15 thousand, of which 39,3 thousand full-time, a the unemployment rate fell from 3,6 percent. up to 3,5 percent. Employment figures remain secondary to the Reserve Bank of Australia, which places more weight on monthly readings CPI. Currently, the market expects the last interest rate hike in September due to rising inflation.

Concerns about inflation are easing

Returning to the US, today we will see the Philadelphia Fed index and existing home sales data, as well as the number of new jobless claims. Labor market data may bring the most volatility, but only if we receive a big surprise. If the reading matches the consensus, drifting EUR / USD is unthreatened.

Today in the calendar of the euro zone are located consumer confidence data for July, with the consensus expecting a virtually unchanged reading from last month. Yesterday, the final core inflation in the euro zone amounted to 5,5%. against forecasts of 5,4 percent. Still, media reports that members of the Governing Council plan to tone down on forward guidance when they raise rates by 25 bp next week suggest that inflation concerns may have eased somewhat.

Source: OANDA TMS Brokers