After a strong market reaction to US inflation data last week, markets have begun to cool as increased risk on the horizon sunk investor sentiment.
The Euro rallied with the US CPI data release, which showed inflation had fallen for the first time in the US. This immediately led bets to be halved for a 75bps hike next September, with many now favouring a more modest 50bps increase. Fed speakers quickly asserted that they would remain hawkish despite the better-than-expected inflation data. The knee-jerk reaction may also be due to lower liquidity in the Eurozone, which is traditional over the summer lul.
Little has changed the macro view of the EU. An impending recession is likely, and continued heatwaves are causing droughts affecting the transportation of coal along the river Rhine, further exaggerating the fuel crisis. This Thursday, we will see the release of Euro CPI, which is expected to remain at 8.9%. From a technical perspective, EUR/USD has broke a significant resistance level of 1.0396 and bulls will likely retest and target resistance at 1.0450 over the coming months.
Over in the UK, GDP data on Friday wasn’t as bad as expected but still highlights a contradiction in the economy. Many analysts blamed the additional bank Holiday in Q2 for the negative print and expect another in Q3. There is lots of data out for the UK this week that may move the needle with average earnings on Tuesday, CPI on Wednesday, and retail sales on Friday. Runaway inflation will give the Bano of England the road to increase rates further, strengthening the pound.
What to watch this week:
Tuesday
GBP Claimant Count Change
GBP ILO Unemployment Rate
Wednesday
GBP Consumer Price Index
EUR Gross Domestic Product
USD Retail Sales (MoM)(Jul)
USD FOMC Minutes
Thursday
USD Initial Jobless Claims
Friday
GBP Retail Sales