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Signposting for further hikes but risks remain

During the first two sessions of the week, the market was focused on signposting from central bank officials and the path of interest rates moving forward. Bank of England MPC member Mann stated that their signs that inflation in the UK is becoming more embedded and persistent. Mann called for more aggressive tightening (she voted for 50 basis points in the last meeting), especially as that would reduce the risk that domestic inflation is further boosted by inflation imported via Sterling depreciation.

Yesterday, Bank of England Chief Economist Pill stated that he sees further policy tightening in monetary policy with the bank ready to act if there is evidence of persistent price pressures. Pill went on to warn the bank faces a narrow path between persistent inflation pressure and recession. This morning inflation hit a 40-year high with an increase to 9.1% from 9.0%, but the underlying rate declined slightly more than expected to 5.9% from 6.2%.

Looking to the remainder of the week we have a combination of economic risks and political risks. In terms of economic data, the market will focus on economic activity to get a handle on whether the UK is heading toward a recession. Key economic activity figures are due for release in the form of the PMI manufacturing and service sector data. The market will focus on the pace of expansion given the slowing of momentum in the last few months. The retail sales figures are posed to highlight further concerns in the sector with the headline figure set to decline by 0.6%, heightening concerns of a recession.

Political risks are likely to increase pressure on PM Johnson on Thursday due to the forecasted double defeat and loss of the by-elections for Wakefield and for Honiton and Tiverton. According to Smarkets, the odds for Wakefield is a 99% Labour victory and for Tiverton and Honiton is a 71% probability of a Liberal Democrats.

Dollar maintains recent strength ahead of Powell’s remarks

The US Dollar continued its recent strength in the early part of this week following the Federal Reserve’s announcement to raise US interest rates by 75-basis points last week. Increased safe-haven demand surrounding concerns over global economic slowdown and expectations that the Fed will continue to aggressively tighten monetary policy continued to support the Dollar. Markets are now awaiting Fed Chair Jerome Powell’s semi-annual testimony before US Congress on Wednesday and Thursday for additional insights over policymakers’ future policy plans.

Powell may face tough questions around how quickly the Central bank expects inflation levels to return to normal, amid concerns around what level of policy tightening will be required and what the impact will be on the US economy. Investors are currently pricing in another 75-basis point hike when the FOMC next meet in July, followed by a 50-basis point hike in September.

It’s a relatively quiet economic calendar this week. Key economic data releases scheduled include existing home sales on Tuesday, followed by PMI manufacturing & Services data set for release on Thursday.

Higher energy prices continue to impact growth forecasts

The Euro remains under pressure against a stronger US Dollar following comments from ECB President Christine Lagarde. Lagarde asserted that the Central bank must be attentive to recession risks as growth forecasts continue to be cut and increasing concerns about a cut in gas supplies. Germany reported receiving 60% less gas from Russia than was agreed and the Nord 1 pipeline accounts for 40% of Russian pipeline supply to the EU. While testifying before the European Parliament earlier in the week, Lagarde commented that policymakers must be flexible to ensure correct policy implementation, suggesting the Central bank is ready to hike rates in July by 25-basis points.

Looking ahead at the economic calendar, EU Consumer confidence data for June is expected to reflect the ongoing impact of higher inflation. Consumer confidence fell sharply this year across the EU and is now close to its pandemic low. It did rise in May from April’s two-year low and a further rise is expected in June.

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