Temperatures soar, but could Europe be left in the cold?

World Markets

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.

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.

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.

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.