Interest rate hikes dominate global markets

World Markets

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.

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.

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.

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.