Risk appetite was boosted late last week as the dollar began to fall and riskier currencies climbed. This was due to better-than-expected growth figures such as employment and retail sales from key economies, leading to a cooling of central bank tightening expectations. Bets for a 100bps hike this month from the FED have dropped, with many analysts now expecting a 75bps move. Still, it’s a sizeable boost.
As tighter monetary policy weighs on global demand forecasts, oil and gasoline prices continue to fall. This, in turn, should relieve inflation once wholesale discounts reach the end consumer, as energy and food weigh heavily on inflation.
The ECB has a lot to sort out with the possibility of an Italian political crisis and a deepening energy shock supply. Raising interest rates won’t solve either of these issues and as the rate divergence between the FED and ECB grows, so does the possibility of long-term parity between the world’s two major currencies.
EUR/USD has traded below 1:1 four times in the last two weeks, and we expect to see it revisit these levels soon again. A lot of Europe problems are out of the control of the ECB, so when they finally raise the interest rate this week Thursday, for the first time in over a decade, it will likely have little effect on markets. Most investors will be eagerly awaiting hints that the September rate hike will indeed be its most significant in the face of deteriorating growth.
It’s a busy week in the UK with a new prime minister lining up as the Tory leadership campaign whittles down to the final two candidates, with Rishi Sunak and Penny Mourdant most likely to progress. GBP/USD is up over 1% on Monday, but UK jobs data will be out on Tuesday and Retails Sales and PMI inflation data will be out on Friday so it could be a volatile week for sterling.
Week Ahead
TUESDAY
GBP Claimant Count Rate, June
GBP Average Earnings, June
EUR Consumer Price Indices, June (Final)
WEDNESDAY
GBP Consumer Price Indices, June
USD Department of Energy Weekly Inventories
THURSDAY
EUR European Central Bank Rate Decision
USD Weekly Jobless Claims
FRIDAY
GBP PMI, July
EUR PMI, July
USD PMI, July