US stock indices came under pressure last week. Fresh data showed a marked slowdown in US inflation, with annual CPI easing from 4.2% to 3.5% and core inflation falling from 2.9% to 2.6%. However, the weaker inflation data failed to support the technology sector. A sell-off in semiconductor stocks, combined with profit-taking after an extended rally, pushed Nasdaq 100 index futures down towards the 28,670 mark.
The currency market saw mixed trading. Softer US inflation reduced expectations of a near-term Federal Reserve rate hike, weighing on the US dollar. However, renewed gains in energy prices kept the risk of stronger inflationary pressures alive. As a result, EUR/USD retreated to around 1.1430 after climbing to 1.1480, while GBP/USD corrected from 1.3540 to 1.3430. Gold also came under pressure as expectations that interest rates will remain elevated pushed XAU/USD below $4,000.
Brent crude prices continue to be driven by developments in the Middle East. Renewed tensions between the US and Iran, ongoing restrictions in the Strait of Hormuz and the threat of shipping disruptions in the Red Sea lifted prices by around 13% over the week. As a result, Brent climbed to around $86 per barrel. Further price direction will depend on whether the conflict escalates into additional supply disruptions or whether both sides return to negotiations.
Canada: Inflation Rate
Canada's latest consumer inflation figures are due on Monday. Economists expect consumer prices to decline by 0.2% month-on-month, following a 1.0% increase in the previous month. Core inflation measures, Median CPI and Trimmed CPI, stood at 2.1% and 2.0% respectively. A few days earlier, the Bank of Canada left its policy rate unchanged at 2.25%, stating that inflation is expected to gradually return to its 2% target. A weaker CPI reading could reinforce expectations that the Bank of Canada may not need to tighten monetary policy further. This would be negative for the Canadian dollar.
UK: Inflation Rate
The UK's latest inflation report will be released on Wednesday. Annual CPI stood at 2.8% in May, with economists expecting it to ease to 2.7%. At the same time, economic growth remains subdued, with data released last week showing monthly GDP growth of just 0.1%. Slowing inflation, combined with weak economic activity, could reduce the need for the Bank of England to maintain a restrictive monetary policy stance. This would be negative for sterling.
ECB Monetary Policy Decision
The European Central Bank's policy meeting will be the key event of the week ahead. In June, the ECB raised its key interest rates by 25 basis points, taking the deposit facility rate to 2.25% and the main refinancing operations rate to 2.40%. Markets now expect the central bank to leave rates unchanged. Although eurozone inflation slowed from 3.2% to 2.8% in June, higher oil prices continue to pose an upside risk to inflation. As a result, investors will focus on the ECB's guidance regarding the possibility of another rate hike in September. If policymakers signal that further monetary tightening remains on the table, this could be supportive for the euro.