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Further signposting for an aggressive hike

Most of the UK’s headlines focused on the Conservative leadership battle. At the time of writing, the party was down to eight candidates. The front runners include Penny Mordaunt, Rishi Sunak and Liz Truss. The eight will likely whittle down to two candidates by the end of next week. They will then campaign to the 160,000 Conservative members who will vote with a new leader appointed by 5th September. Once we get further down the process, emerging policies will likely impact the sterling. 

Sterling remains on the backfoot despite the more aggressive tone from the central bank and positive economic data. BoE Governor Bailey spoke yesterday about the economic landscape at an event hosted by the Official Monetary and Financial Institutions Forum. He echoed a similar tone to the Chief Economist Pill, stating they will be vigilant on sustained inflation and act strongly if necessary.

In the meantime, the monthly GDP bounced back from two consecutive months of contraction by growing 0.5% for May against a flat reading. However, the effect of the position of the bank holidays is unarticulated. 

For the rest of the week, UK data is pretty quiet. The market will keep one eye on the Conservative leadership battle.

The single currency breaches parity 

The big news from the Eurozone was that EURUSD posted a 20-year low, breaching parity before rebounding slightly. The single currency remains under pressure as doubts persist about the ability of the ECB to push ahead with significant interest rate hikes, given the stress on growth. 

Compounding pressure, the German ZEW headline numbers for July showed that the Economic Sentiment Index slumped to -53.8, missing estimates of -38.3. The ZEW is an index based on surveyed German institutional investors and analysts. The President of the ZEW highlighted major concerns, including energy supply, interest rates and pandemic-related restrictions led by China lockdowns.

  • For the remainder of the week, the market will focus on the price of EURUSD, paying close attention to where it closes the week from a technical perspective.
  • Today, the EU Economic Forecasts will release alongside the final consumer price index for Germany and France as well as industrial production numbers.

Inflation and growth data come into focus 

Kansas City Fed President George stated that the speed at which interest rates increase is an open question. The pace needs to be balanced carefully against the state of the economy and financial markets. Whilst we saw a strong US dollar, there is not a massive focus on economic data but rather a negative sentiment elsewhere. The market will focus on inflation data to understand if the recent hikes impacted growth data for momentum.

  • The remainder of the week will focus on US economic calendar, including the release of CPI Inflation data on Wednesday, followed by PPI inflation data for June.
  • Consensus forecasts expect US CPI inflation to have risen again to 8.8%, a new four-decade high reflecting increasing 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 are set for release later in the week. However, investors will be wary of any acknowledgement that there are signs growth is weakening by more than expected. Likely, any downside surprises will not stop policymakers from maintaining an aggressive tightening pace at the meeting.

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