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Data remains soft, but the BoE is set to hike by 50 basis points next week

It was a quiet start to the week for sterling, with no significant economic data released. Sterling gained against the single currency as gas concerns continued to impact Europe. In the meantime, Liz Truss and Rushi Sunak went head to head on BBC’s live debate. As it stands, Liz Truss remains the bookies’ favourite to win the race to become the new Conservative leader. 

In terms of data, the second tier was softer; this presented the market with questions about the economy’s ability to weather future hikes. The UK CBI retail sales index recovered marginally to -4 for July from -5. This figure was slightly stronger than market expectations of -10. It represented the fourth successive decline in sales. Retailers expect further difficulties in August.

As a result of the extended run of soft data, the sterling was quieter on concerns that the BoE may not raise by 50 basis points next week (still circa 90% probability). The currency remained subdued on deeper questions the market pondered; how high can rates go before hindering the economy? The cost-of-living crisis continued to be topical, with its effects on the economy potentially damaging, hence it being front and centre in the Conservative leadership contest.

As mentioned earlier in the week, it is quiet in terms of economic data. We have the lending figures on Friday for the market to monitor, given the increasing cost of borrowing. In the meantime, the market will keep a close eye on Liz Truss and Rushi Sunak’s bids to become Conservative party leader and, by default, the next Prime Minister, whilst risk trends in the wider could affect sterling’s performance.

Energy price fears weigh on the single currency 

The euro faced heavy selling pressure in the early stages of this week as recession concerns and the ongoing energy crisis spooked investors away from the single currency. Recent bond market fragmentation across the Eurozone remains a risk, even though peripheral bond yields have not yet widened relative to their core counterparts.

The ECB hiked interest rates this month. A weak growth outlook continues to raise the question of how much policymakers can accomplish with a change in policy outlook. On Tuesday, the renewed pressure from the US dollar came as investors became increasingly concerned over Europe’s energy supply problem.

This week saw EU countries agree to reduce gas use for next winter, aiming to cut use by 15% in the upcoming six months. Russia announced it would reduce gas supplies through its Nord Stream 1 pipeline to only 20% capacity. The news stoked fears that Eurozone growth will slow further. More importantly, the statement means energy stockpiles will likely be insufficient for winter.

Looking ahead to the remainder of this week, investors will pay close attention to unemployment numbers from France and Germany. The standout economic data release comes from updated inflation figures which indicate an increase to 8.7%. GDP readings release on Friday.

Dollar gains momentum ahead of FOMC meeting

The US dollar gained momentum early this week, underpinned by risk-aversion and market expectations ahead of Wednesday’s FOMC meeting. The change in momentum from last week saw the US Dollar Index regain ground, moving above 107.00 on Tuesday. Economic data released reported that US consumer confidence figures for July were weaker than expected at 95.7, below the consensus estimate of 97.0. The data highlights a fall from a reading of 98.4 in June.

Meanwhile, the latest release of housing data fell below expectations, increasing recession fears ahead of Wednesday’s FOMC meeting. The report released by the Conference Board signalled that with an expected higher interest rates policy outlook by the Fed’s policymakers, intentions to purchase homes, cars and appliances all fell in July.

This week, investors focus on the FOMC July meeting on Wednesday and the adjustment towards future monetary policy. The market widely expects a fourth successive interest rate. However, there appears to be some uncertainty over the size of the increase. Investors favour a 75 basis-point hike announcement. There are no dot plots released at this meeting.

Nonetheless, the Fed’s accompanying commentary and statement will draw much attention as tighter monetary policy comes as the US economy slows down and inflation runs at record high levels.

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