GBP
Queen Elizabeth II passed away aged 96 years last Thursday, and the UK is now in a period of mourning for our longest-standing monarch in history, with a new bank holiday announced for Sep 19, the day of her funeral. Despite an uptick in tourism and hospitality predicted for this day, the loss of production will significantly impact the UK economy, with costs estimated to be around £ 3 billion. The extra day off could technically put the UK into a recession.
New PM Liz Truss revealed her plan to cap household energy prices for two years and businesses for six months. The policy will directly impact rising inflation but will cost £150billion. Add that to the current £2.8 trillion deficit, and investors will consider the UK with caution. In this case, a weaker pound may help encourage money into the country, but a stronger pound is what we got, rising from 1.14 last week to 1.17 against the Dollar today.
The BOE was supposed to meet this Thursday, but for obvious reasons, this meeting has been postponed until Sep 22. We expect they will increase the rate by 0.5% to 2.25%, with analysts predicting we will hit 3.5% by year’s end.
EURO
In Europe, the ECB hiked interest rates by 0.75% on Thursday, which kicked off an uptrend for the beaten currency. The ECB said, “because inflation remains far too high and is likely to stay above target for an extended period.” they will continue to increase rates at every meeting. The new hawkish tone saw the Euro appreciate 3.5% against the US Dollar, trading from below parity at 0.98 last week to 1.019 this morning. Bloomberg is giving an 80% probability of another 0.75% rate hike in October. The Euro looks set for lift-off in the coming months so long as the energy war with Russia begins to bite.
USD
The Dollar may have reached its peak this year, topping off the DXY at a mighty 110. We expect CPI data this week to show a decline in MoM inflation which is a positive for the economy, especially running up to the November mid-term elections. Fed chair Powell reaffirmed his commitment to keeping rising rates until inflation is below 2%, so we should still see plenty of flow into the Dollar for the foreseeable. In the interim, we will likely see profit taking from Dollars into Euros and GBP. Any significant world catastrophes like development in Ukraine, tensions with Taiwan or the dreaded Global Recession will see flows into the Dollar haven.
This week the focus will be on Tuesday’s CPI data reading from the USA, as this will dictate the policy of the Fed in the future.