Jamie Jemmeson
August 3, 2022

Will the BoE disappoint or provide a further basis for action?

Energy price forecast reinforce recession forecasts

It has been relatively quiet the first 48 hours of the week, with only a tier two data set released. The UK PMI manufacturing index for July was revised marginally lower to 52.1 from the flash reading of 52.2 and confirmed at a 25-month low. The data had little impact, with markets focusing on global trends and position adjustment ahead of Thursday’s Bank of England policy decision. There were further market expectations that the central bank would increase interest rates by 50 basis points this week, moving from 90% probability to 95%. Several institutions predict 25 basis points (including Morgan Stanley and NatWest), citing recession concerns. 

The critical event for pound sterling will centre on the Bank of England policy meeting. As mentioned previously, the Bank of England will likely rise by 50 basis points which will be the most significant hike in 27 years. The market will look at the actions taken and the officials’ comments for signposting on future policy actions.

Currently, the BoE is lagging in action taken by other central banks as it juggles growth and inflation. This is further complicated by the battle to be the next leader of the Conservatives and, by default, the future prime minster. Campaigning included several comments about how to tackle the cost-of-living crisis. On Friday, BoE Chief Economist Huw Pill will speak via satellite about the latest interest rate decision at the Monetary Policy Report National Agency Briefing. 

Dollar supported following hawkish Fed comments

The US dollar traded at elevated levels during the early part of this week. Several Fed speakers presented a unified front to talk down any concerns that they were not committed to combating rising inflation. Notably, Cleveland Fed President Loretta Mester commented that she does not believe the US is suffering a recession, adding that the labour market is in good shape. However, she noted that inflation has not decreased “at all”. All signalled separately that rate hikes would continue at the necessary pace until price increases are under control. Investors expect additional speakers, including James Bullard and Patrick Harker, to continue with the same rhetoric today.

Elsewhere, market participants will continue to monitor the geopolitical tensions between the US and China over Taiwan and the possibility of increased safe-haven flows.

The labour market remains a key condition regarding the Fed’s pace of policy tightening. This week’s highlight economic release in the US comes from the July nonfarm payrolls report and unemployment rate, scheduled for release on Friday. The June payrolls reports posed more questions than answers when released a month ago, even though it was the weakest number this year at 372k. It was still much higher than expected, with the unemployment rate steady at 3.6%. Weekly jobless claims rose steadily for the past three months. The increase in jobless claims appears to be the first sign the US labour market weakened, which will increase the focus on the headline figure on Friday.

Energy price pressure and rising inflation weigh on the Euro

The euro remains under pressure, trading at levels close to the lows this year against several major pairs. Two main issues plague the single currency. Firstly, the European Central Bank attempted to tame rising inflation pressures while preventing bond market fragmentation. Secondly, increasing stagflation fears persist as energy prices soar and growth slows. ECB policymakers face concerns about high gas prices for Europe’s industry and consumers for the rest of this year. Also, the unchanged unemployment is a significant hurdle for policymakers while planning for policy tightening over the coming months.

Looking forward, markets’ focus will centre around the release of updated Industrial production figures set for release on Friday. Ahead of that release, Eurozone PMI second readings are scheduled for release today. However, it’s worth noting that these are second readings; they are not expected to be revised significantly from their initial readings. Also due for release today is Eurozone June retail sales figures. 

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