July 2022

GBP
There was a fair amount of data on Friday for investors to digest. New orders increased slightly as did business optimism, however this was offset by other numbers missing the mark. Services-sector index fell to a 17-month low but did come in above market expectations and finally, UK PMI manufacturing numbers hit a 25-month low – in line with consensus forecasts. The Conservative leadership contest will be of interest this week as both contenders reveal more about their economic policy. With GBP looking particularly fragile to external forces, any unexpected announcements from either potential leader could see increased volatility.

EUR
Euro-Zone, German and French PMI manufacturing index numbers all showed contractions, with the Euro-Zone numbers hitting 25-month lows. Services-sector readings also missed their targets and again there were 15-month lows for the Euro-Zone as a whole. New orders declined which only added to Euro woes meaning the single currency ended the week pretty badly. There are increasing fears over the health of the Zone’s economy with particular concern over Germany. It makes up such a big part of the region and is very heavily reliant on Russian gas, with the German Bundesbank stating that the economy will remain weak, the outlook for energy markets is bleak and inflation is likely to spike. Geopolitical issues continue to weigh heavily on the single currency with volatility expected to continue going into this week.

USD
The Dollar had a reasonably difficult end to the week with the news that the Fed are unlikely to raise rates on Wednesday by the previously rumoured 100 basis points but “only” by 75 basis points. Despite this being a significant raise, the market saw it as a fall in one measure of long-term inflation. All eyes will now be focused on the rhetoric around the decision and any hints as to what the Fed may do at the next meeting on 21st September. Thursday sees US GDP data and Friday sees Core CPE Price Index readings, however, unless there are significant movements above or below expectations Wednesday’s Fed meeting will steal the headlines. One thing of note is that if Thursday’s GDP data sees a contraction, it would mean that the US meets the conventional definition of a recession (the US uses a different definition). This could see the Dollar fall, however, if the global outlook remains poor and this is seen as a prelude to recessions elsewhere, USD could be a safe haven.

A positive start to the new week for global markets has benefited the British Pound but put the Dollar on the back foot, although analysts remain of a view these ‘risk on’ episodes are likely to remain fleeting.

The Dollar was sold and commodities and stocks bought amidst an improved global backdrop that is being attributed to two developments: one regarding China and the other concerning the U.S. Federal Reserve. People’s Bank of China Governor Yi Gang was reported to have said the central bank will step up with stronger support for China’s struggling economy, a development that should cushion against investor fears of further Covid lockdowns in the country.

GBP
A quiet Friday for the Pound saw it gain very slight support during the day. This was due to a combination of virtually no domestic data and strengthening risk appetite which saw the Dollar slip a bit. The Pound had a good week against the Euro off the back of better-than-expected GDP data and the markets will continue to monitor the Conservative leadership race for any hints at economic policy. As the UK braces for potentially record-breaking temperatures, investors will be keeping an eye on the data releases this week of which there are quite a few: labour market, inflation, PMIs and retail sales to name the main ones. Many feel that this data will let us know if we are past the peak of the storm or in the eye of it and will therefore provide a strong indicator as to whether the MPC raise rates by 25 or 50 basis points.

EUR
This could be a very interesting week for the Euro given the data and political situation that we can expect this week. Thursday sees the ECBs decision and council member Rehn has already come out and said that the central bank is likely to raise rates by 25 basis points, which would be the first rate rise in over a decade and would lead to Euro strength. What will be of interest, however, is what Putin decides to do with the Nordstream 1 pipeline. It has been closed since the 11th of July for maintenance and is due to reopen on Thursday. Many believe this could be a way for Putin to put pressure on the EU and, if it remains closed, could end up with the EU in several quarters of recession primarily due to their reliance on Russian gas. What could be seen as positive news for the Euro off the back of the ECB’s potential rate hike could very quickly be reversed if Nordstream 1 remains closed.

USD
US retail sales increased for June (above consensus forecasts) as did underlying sales providing an element of support for the greenback. This support was limited, however, as the numbers were not considered significantly stronger than expected. Consumer confidence edged higher but was offset by lower than expected 1-year and 5-year inflation index numbers. Given the Fed’s close monitoring of inflation, fears of a 100 basis point hike subsided with the Dollar losing a bit of defensive support. Markets will monitor the media very closely as the Fed goes into its blackout period for any indication as to what they are thinking. Data will play its part (as mentioned above) but last time a Wall Street Journal report make a correct prediction which will no doubt play its part this time around.

The end of last week saw the Dollar strengthen even further. A global lack of risk appetite coupled with US Fed Chairman Powell’s comments that the US would be pressing ahead with multiple interest rate hikes despite recession fears drove the greenback higher against both Sterling and Euro.

There are now serious concerns over European economies, most notably the UK and investors are now scrambling to work out what this means for interest rate hikes for the remainder of 2022. This has led to both GBP and EUR selling off versus the greenback, which was perhaps exacerbated further due to reduced flows coming into US Independence day celebrations that resulted in increased volatility.

GBP
Sterling experienced another torrid end to the week, hitting fresh lows against the Dollar. This week has started with fresh concerns and increased UK-EU tensions over the Northern Ireland Protocol.  Despite GBP trading lower, the current Brexit agreement complexities are likely to dissuade traders from placing any bullish bets around the British pound. In the latest development, the UK House of Commons last week voted in favour of a bill that would unilaterally overturn part of Britain’s divorce deal from the EU, which is only adding to the uncertainty. This week we see manufacturing PMI data out on Tuesday, BOE members Pill and Cunliffe speaking Wednesday, before a quiet end to the week for GBP where attention will turn elsewhere.

EUR
Last week saw the Euro drop further against the USD, with a number of investment banks now forecasting we may see the currency cross trading below parity by the end of July. There are fresh concerns over the inflationary pressures broadening in the Eurozone amid no end in sight to the soaring energy and commodity prices being driven by the continued conflict in Ukraine. A number of major economies are now expected to fall into recession over the next 12 months and the ECB is under pressure to get out of negative interest rates and give themselves increased headroom to deal with the situation should recession be confirmed across the Eurozone. Economic data releases are relatively light this week with the exception of retail sales for May being released on Wednesday, which will be another indicator as to the likelihood of a recession.

USD
Markets are closed in the US today which will likely be the quiet before the storm of key data releases later in the week. Investors will be looking to see if economic data to be released later this week backs up the current strength of the Dollar, namely June Services PMI data on Wednesday which will give a good update on the state of the economy, as well as FOMC minutes from the June Federal Reserve meeting being released. Thursday will then bring initial employment data before the key data point of the month for USD on Friday, Non-farm payrolls. Investors are still expecting a strong number which could bring about another volatile end to the trading week.