Jamie Jemmeson
July 18, 2022

Markets continue to monitor BoE rhetoric

Will GDP confirm the Bank of England

Sterling continues on a backfoot despite some positive economic readings. After two consecutive months of contraction, the monthly GDP bounced back. It grew by 0.5% for May. This beat forecasts of a flat reading from the market.

The position of the bank holidays is not yet articulated. In the meantime, the market continues to decipher rhetoric from central bankers to define the path of interest rates. BoE Governor Bailey spoke about the economic landscape at an event hosted by the Official Monetary and Financial Institutions Forum. He captured a similar tone to the Chief Economist Pill, committing to act strongly against sustained inflation, if needed.

So far, market reaction to the UK Conservative leadership contest is limited, as the field of candidates reduces. There will also be ongoing attention on the Conservative leadership contest, with the party’s MPs set to whittle down candidates to the final two by the coming Thursday. Televised debates will take place before Monday’s next round of voting. The last two will campaign to the 160,000 Conservative members who will vote with a new leader appointed by 5th September.

On Monday, Saunders is due to speak whilst BoE Gov Bailley is speaking at the annual Mansion House Financial and Professional Services Dinner (historically, sterling is volatile around this speech). Regarding economic data, the UK’s headline inflation indicates a rise to 9.3%, up from 9.1% on Wednesday. A higher figure could force a more aggressive policy for the central bank. Friday will see some critical economic activity figures released from the UK retail sales and flash PMI services and manufacturing.

Will the ECB’s first rate hike since 2011 disappoint?

This week, much of the focus was on the EURUSD currency cross, following its breaching parity and posting a 20-year low. Economic data did not help, as the German ZEW headline numbers for July showed that the Economic Sentiment Index slumped to -53.8. This figure missed estimates of -38.3. The ZEW is an index that surveys Germany’s institutional investors and analysts. The President of the ZEW highlighted significant concerns, including energy supply, interest rates and pandemic-related restrictions led by China lockdowns.

Following the EURUSD breach of parity, the currency pair moved higher, rejecting the lows. However, we have a big week for the single currency that could determine its direction moving forward.

Looking to the week ahead, the main focus will be on the European Central Bank, which will likely announce its first increase in interest rates since 2011. Currently, the ECB signalled its intention to raise rates by 25bp, taking the deposit rate from -0.5% to -0.25%, with a further increase in interest rates expected in September, including the possibility of a larger 50bp.

The ECB meeting and announcement are due on Thursday at 1.15 pm and the press conference at 1.45 pm. The market will watch for any divergence in the hike size given the current conditions. It will pay particular interest to the tone of the ECB, especially with inflation and the currency’s weakness. We have the region’s PMI service and manufacturing data in terms of economic data.

Inflation and economic activity continues to post strong readings

The US dollar makes continued gains as economic data has not shown inflation slowing, and the economy posts growth. The Consumer Price index jumped 1.3% in June. The index measures changes in the cost of a basket of goods. This figure compared to the 1% increase in May — a sign that inflation kept burning hot last month. On an annualised basis, the index in June hit 9.1%.

In the meantime, retail sales rebounded strongly in June. Sales of gasoline and other goods accounted for more spending in the US amid soaring inflation, potentially easing concerns of an imminent recession. Retail sales rose 1.0% last month against 0.8%. Economic activity was more significant than expected, posting a reading of 11.1, where a third consecutive contraction was anticipated.

Regarding interest rate, it is worth noting that whilst the Federal reserve signposted a 50 basis point hike for the next meeting, various members expressed a higher move. St. Louis Federal Reserve President Jim Bullard says he will favour raising the policy interest rate by 75 basis points.

Looking to the week ahead, it will be quieter as there are no Fed speakers. The central bank enters its blackout period ahead of the following policy update. Economic data will focus on the PMI services and manufacturing data on Friday for headline activity readings. The Philadelphia Fed manufacturing is due on Thursday, as well as the existing home sales numbers on Wednesday.

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