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Could we see a 75bp hike from the Bank of England?

Following Boris Johnson’s resignation as Prime Minister, the market reaction was limited, with sterling strengthening at the end of the week. After months of speculation, the end of his tenure is in sight. This may largely be due to the potential or more amicable negotiations with the EU regarding Brexit discussions.

Regarding economic data, the June services PMI was revised to 54.3, and the future output index declined for a fifth consecutive month to the lowest since May 2020. In addition, the market kept a close eye on Bank of England (BoE) officials as they continued to decipher rhetoric for clues on future policy action. BoE Chief Economist and MPC member Huw Pill stated that he is open to a more considerable 50bp hike at the next meeting.

Looking to the week ahead, the market will watch the developing political situation within the Conservative party and their plans for a leadership battle. Regarding the direction of interest rates, following the Chief Economist’s rhetoric last week, the market will keep an eye on BoE Governor Bailey’s tone as he speaks on both Monday and Tuesday, respectively.

The monthly GDP (May) is expected on Wednesday. However, the data for May and June is likely to be more challenging to interpret because of the statistical effect of the Queen’s Platinum Jubilee in June. May’s GDP is expected to remain flat. In addition, the industrial and manufacturing production numbers will release on Wednesday.

Dollar remains elevated amid risk-off mood

Last week saw US dollar hit fresh new 20-year highs against the euro following a robust jobs report. The currency remains underpinned by safe-haven flows. Towards the end of last week, the Dollar index edged above 107, the highest level since September 2002. Last week’s standout economic data release reported that non-farm payrolls grew by 372k in June, while the unemployment rate stayed at 3.6%, which confirmed a return to pre-Covid levels, supporting the case for another super-sized rate hike from policymakers in July. The minutes of the Fed’s June policy meeting reaffirmed that interest rates would likely rise at the coming Fed meetings. With markets pricing in another 75-basis points following two of the most hawkish policymakers, Christopher Waller and James Bullard backed raising rates at a rate of 75-basis points.

Given the Feds continued aggressive policy outlook amid mix data signals, investors will pay close attention to this week’s set of economic figures. The US economic calendar includes the release of CPI Inflation data on Wednesday, followed by PPI inflation data for June. Consensus forecasts expect US CPI inflation to rise again to 8.8%, a new four-decade high, reflecting rising energy and food prices. PPI inflation is likely to remain elevated, suggesting that there are still substantial cost rises in the pipeline.

June’s US Retail sales and industrial production figures will release later in the week. It’s likely that any downside surprises will not stop policymakers from maintaining an aggressive tightening pace at the coming meeting. However, investors will be wary of any acknowledgement that there are signs growth is weakening, potentially by more than expected.

Single currency hits 20-year low 

Last week, the single currency hit a 20-year low against the US dollar due to a combination of factors. Last month, Russian gas deliveries to Europe fell 40%. This kept Europe’s power prices pressured to the upside. In a further sign of increasing gas prices, the Nord stream is due to close for its annual maintenance shutdown on July 11-21st. In addition, there were fears that a labour dispute threatened to shut down oil and gas fields which would cut Norway’s gas supplies by almost 60% had the Norwegian government not stepped in to end a strike.

ECB’s Nagel comments did little to support the euro in the early stages of this week. He warned against using monetary policy aggressively, which should only be used in exceptional circumstances. In terms of data, Germany recorded a deficit in its goods trade balance for the first time since 1991. This mainly resulted from sharply higher imported energy costs, especially after Russia invaded Ukraine. Minutes of the ECB’s June meeting reaffirmed a likely 25bp hike later this month and a possible 50bp rise in September.

Looking to the week ahead, ZEW sentiment is set for release on Tuesday, which will provide a feeling reading from the institutional investors. This is quickly followed by the EU Economic Forecasts. On Wednesday, the final consumer price index for Germany and France will release along with the industrial production numbers.

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