The currency market started the week very quietly with hardly any movement in the euro/dollar while the British pound is slightly weaker.
Currency investors are mainly awaiting the Federal Reserve interest rate decision next Wednesday. The pound sterling is slightly lower compared to the euro, as the plan to reopen the British economy is delayed by four weeks due to the rapid spread of an Indian strain of the coronavirus.
As a result, the number of infections threatens to rise to the levels seen at the beginning of this year. Although this will lead to fewer hospital admissions due to the large number of vaccinated, it still shows how precarious the situation around the pandemic is. The market reacts to this with a slightly lower rate of the British pound, although one cannot make too much of such a limited movement.
With the Federal Reserve interest rate decision, President Jerome Powell is expected to convince the market even more that rising inflation is temporary in nature and not a reason to talk about phasing out expanding monetary policy. The market is already quite convinced.
One way to do that is if Fed policy makers do not adjust their inflation expectations for 2022 and 2023 too much upwards after the strong increase this year.
So the expectation is that Powell will stay on the ground. If he were to become more specific about the moment when a reduced stimulus would be appropriate, this could lead to speculation about a reduction in the broad monetary policy and a stronger dollar. Powell is expected to give this kind of hints later this summer.
In terms of economic figures, the US retail sales in may seem the most interesting this week. This has recently been a volatile figure that can be quite different from the market expectation. When that happens, the market often reacts to that too. The new number will come out on Tuesday afternoon.
On Monday, the euro was 0.06 percent higher against the dollar at 1.2115, and 0.27 percent higher against the British pound at 0.8603.