Forex This Week: Inflation and consumption differentials, Delta variant to catch market attention

Has US inflation accelerated? That is the main question for broad markets. If the Core Consumer Price Index (Tuesday, 12.30 GMT) rose in June above 4%, it could push the Federal Reserve to tighten its policy sooner rather than later, beginning by printing fewer dollars. A taper of the bank's bond-buying scheme could benefit the US dollar and put pressure on most major currencies and gold. On the other hand, inflation may have peaked last month – perhaps due to diminishing base effects, the sharp fall in prices seen in the spring of 2020. In that case, the Fed would feel comfortable purchasing $120 billion in bonds for longer.

On Wednesday, investors will also eye the UK Consumer Price Index (0600 GMT) data for June. Inflation surprised to the upside in May with a jump from 1.8% to 2.1% YoY. Nevertheless, that figure was driven higher by base effects – the fall in prices that time last year. Moreover, the BOE's dovishness also implies inflation is unlikely to surge, which keeps the GBP capped.

On Thursday, the UK releases employment figures (06:00 GMT), which will likely remain upbeat. The Unemployment Rate surprised with a drop to 4.7% in April, and a similar low level is likely for May. 

Expect the Thursday Asian trading day to be a busy one. Australia will publish its June monthly employment report (03:00 GMT), which could have an impact on the currently bearish AUD/USD. Worse-than-expected figures could accelerate the AUD slide.

Keep an eye also on the Chinese GDP for the second quarter (Thursday, 02.00 GMT). China is the world's second-largest economy and better growth figures in China could cheer investors, supporting equities markets and the aussie. Disappointing data could weigh on sentiment, supporting the US dollar.

In the same Asian session, the Bank of Japan’s meeting and policy affirmation (03.00 GMT) could offer further liquidity support to the economy, perhaps through more stock purchases, but the pointlessness of BOJ efforts will not change, so USD/JPY should not react much to the event. 

US Retail Sales (Friday, 12.30 GMT) for June will be another key metric to evaluate the state of the consumer activity in the US, the world's number one economy. The consumption-centered US economy has seen a disappointing drop in headline sales and the Control Group – aka "core of the core" – back in May. A few hours later, the last big data release of the week will be the University of Michigan's preliminary Consumer Sentiment Index for July (14.00 GMT), projected to advance from June's 85.5 points yet remain below pre-pandemic levels. 

The dollar needs good US statistics, particularly in the job market, and rising or at least stable Treasury yields, to improve. 

On the pandemic front, concerns over the Delta variant exponential evolution will catch the eye of markets all week, particularly in Europe and the United Kingdom, but also rising in the United States. 

Will Delta dent US economic growth? The highly transmissible strain has already landed in America, and many remain unvaccinated. President Joe Biden's aim to reach at least 70% of adults with one jab by July 4 came and went, and among the 68% of those over 18 years of age who have received one shot, many still lack the second dose needed to protect against the new variant. States vary widely in immunization levels. Investors will be following case numbers – which seem to have bottomed out – and also await a pickup in vaccinations.

Cases are rising in the old continent, particularly in the service-sector heavy countries such as Spain and Portugal, so new restrictions could be imposed, which would further damage the European economic activity and continue to spook the EUR. 

In the UK, will PM Johnson stick to his promise to reopen the economy? That heavily depends on covid cases, which also hinge on Britain's efforts to reach as many people as possible with first and second vaccine doses. Over half of the population is now fully immunized, yet the rapid spread of the Delta variant means more needs to be done. Sterling should be more sensible to covid news than to the aforementioned data releases.