Jamie Jemmeson
July 4, 2022

Sterling remains fragile amidst mounting risks

Will GDP confirm the Bank of England

Sterling remains vulnerable against the euro and US dollar amidst the combination of growth concerns, higher inflation and ongoing political unpredictability. Scottish First Minister Sturgeon announced that the government will publish an independence referendum bill. The bill will be consultative with a proposed vote in October 2023. Sturgeon also stated that the UK Supreme Court will be asked to rule on whether a referendum vote would be legal without approval from the UK government. There are notable obstacles to overcome before any referendum.

In the meantime, the Bank of England’s rhetoric continues to be somewhat more cautious than most of its peers with more of a focus on the need to balance growth and inflation risks. At the ECB Forum BoE Governor Bailey noted his concerns about both. Once again, he suggested that market interest rate hiking expectations may be excessive. Subsequently, we saw the implied interest rate for December drop from circa 3% to 2.75%.

In the week ahead, economic data is light with the second and final reading for the PMI Service and Construction data (Tuesday and Thursday respectively). However, we don’t expect too much change. In addition, there are a lot of speakers from the Bank of England on the calendar. On Tuesday, BoE Governor Bailey will speak about the Financial Stability Report. On Wednesday, BoE Chief Economist Pill and BoE Deputy Governor Jon Cunliffe will speak at the Global Banking and Finance Conference, in London. This is followed up by BoE member Mann who is due to speak on Thursday. The market will focus on the tone especially given Bailey’s desire to balance inflation and growth.

Will record inflation lead to a faster rate curve? 

The single currency came under pressure last week from the US Dollar following concerns about growth and recession. Inflation continues to soar, reaching a new record high of 8.6% on an annualised basis, up from 8.1% in the month prior. France and Spain hit new inflation records. The latter jumped the 10% threshold for the first time since 1985.

The ECB signposted that it will raise interest rates in July and September. ECB President Christine Lagarde adopted a hawkish view, noting that if the inflation outlook does not improve, it will have adequate information to move faster. Lagarde spoke to the audience in Sintra, Portugal, about the period after the hike. However, the concern moving forward is how fast can they raise and what the unintended consequences will be.

Looking to the week ahead, the main focus will be the EU economic forecasts, which will help articulate the economic path for the various EU members. ECB President Christine Lagarde is also due to speak at the Economic Meetings of Aix-en-Provence, in France. The market will keep a close eye on her rhetoric for clues on policy moving forward. In terms of economic data, the market will focus on PMI Services (Tues), retail sales (Wed) and German Industrial production (Thurs).

Dollar supported on global recession concerns

Financial markets continue to be dominated by concerns about a looming global recession, prompting higher demand for the US dollar due to safe-have demand and a dragging lower of global stock markets. Aggressive monetary policy tightening, despite increasing concerns regarding economic headwinds in the global economy, saw the US Dollar underpinned throughout last week.

The message from policymakers remains unchanged. They are most concerned about higher-than-expected inflation. Significant further interest rate rises are still anticipated.

There’s a significant amount of data set for release in the week ahead that could lessen or heighten those concerns. Most notably the latest US jobs report will provide investors will fresh clues over the Feds’ likely rate tightening path. However, even if there is a possibility of positive relief from next week’s releases, higher inflation, and central banks’ responses to taming rising inflation will pose a downside risk to sentiment.

Looking to the week ahead and the US economic calendar, investors’ attention will surround the Fed Minutes report from the previous meeting where they surprised markets and raised rates by 75-basis points in the month prior. Also set for release are factory orders on Tuesday, followed by the latest ISM Services data released on Wednesday. The standout economic release comes towards the end of the week when investors will review the latest labour market report. The US economy added 295k jobs in June, slowing from May’s print of 390k. The unemployment rate will likely hold steady at 3.6%. Furthermore, average hourly earnings are forecast to maintain monthly growth of 0.3%, which would point to real wage growth remaining negative in June.

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