August 2022

Last week Europe seems to have been at both the mercy and peril of the hot weather. With the UK producing a jump in retail sales in July, and the river Rhine proving to cause trade issues, leaving vessels in standstill traffic and some cases stranded due to the lack of rainfall. This week’s calendar will bring another tumultuous week of trading with Monday’s focus on the Bank of China’s interest rate decision, and then on Tuesday, eyes will be on Germany’s Composite and Manufacturing PMIs.

GBP
After the CPI figures for July surged to a 40-year high last week, GBP has opened weak against the dollar in particular, following the news from across the pond that a recession may be avoided in the states last week.

Meanwhile, a second day of strike action is underway at the UK’s busiest container port after workers walked out on Sunday in a pay dispute. The Union Unite said around 1,900 of its members were striking, expected to last eight days, at the Port of Felixstowe in Suffolk. If the strike continues as planned there is great concern about the impact of the strike on shipping companies and the delay in imports being received. With companies looking elsewhere within the UK to receive the shipments at alternative shipping ports.

Additionally in the UK, with Inflation set to hit 13% by the end of 2022, the conversation around the cost of living continues with under the ’30s facing a growing cost of renting crisis with statistics showing 4 in 10 of this age group are now spending more than 30% of their pay on rent. Making rental costs unaffordable and extremely concerning as a recession continues to loom. For the Economic calendar, attention is on the PMI data released this week for the UK, Europe and US.

EUR
EUR/USD today has fallen below parity as the market opens this morning, with the US dollar continuing to rally from the previous week’s hawkish Fed expectations. The euro continues to look vulnerable, hitting a 5-week dip with Russia announcing a three-day halt to the European gas suppliers via the Nord Stream 1 pipeline again at the end of August, deepening the EU energy crisis. As well as recession and inflation risks continuing to spiral as the Euro weakens further.

Eyes are on Germany’s composite and manufacturing PMI data released this week. Which could continue to weaken the Euro further if a negative outcome.

USD
After a strong week for USD, hitting a 5-week high, this week we could see the save haven currency strengthen even further after the Feds hawkish announcement of the states (somehow) avoiding the expected global recession. All eyes remain on the Fed policy makers speaking at Jackson Hole this week ( 25-27th Aug) with Fed speakers stressing the message that more rate hikes are coming given “The fight against inflation has not yet been won,” amid growing expectations for Fed Chair Jerome Powell to stress that tightening is “still a long way from the end,” Markets are predicted to remain strong amid Chinese stimulus bets and the European energy crisis.

GBP
The Bank of England has warned that inflation could hit 13% by the end of the year. In addition to the political vacuum and roaring energy prices, parts of the UK are now suffering drought-inducing heat waves. With UK Employment & Inflation numbers being released Tuesday & Wednesday, further harmful economic data could cause GBP to experience an increase in volatility mid-week. If the UK sees both unemployment & inflation numbers up, we will see a weakening of the GBP against the Dollar and Euro.

EUR
The Euro Zone is expected to release similar economic data on Wednesday increasing the chances of volatility across the market mid-week. Employment Change & Gross Domestic Product for Q2 will give us an insight into the European Union’s current economic state. The GDP figures set to be announced will impact the value of the Euro significantly, depending on the positive or negative nature of the data. The GDP is considered as a broad measure of Euro Zone economic activity, and a rising trend will have a positive effect on the currency.

USD
The Dollar is expected to see a slow start to the week, as it tries to increase in value after a poor performance last Wednesday through Friday. On Wednesday the US is expected to release its Retail Sales data for the month of July. Positive changes in US retail sales are seen as Bullish, & the preferred movement of the economy. In addition, the FED will be releasing its Open Market Committee minutes which will give market analysts a clear insight into the future US interest rate policy.

GBP
Last week saw the Bank of England spook the market slightly with aggressive downgrades on the economic outlook alongside an interest rate hike. They confirmed that rate hikes were likely to continue, but the UK is expected to enter a 5 quarter recession later this year with inflation peaking around 13%. Friday’s GDP report also indicated that the UK is already in a recession, however, a rebound is expected in Q3 hence the recession starting in Q4.

On slightly more positive news most economists seem to think that most of the bad news is priced in, with many feeling that the Bank of England is more realistic in its news than the Fed or the ECB. A quiet week data-wise ahead for the Pound, but nervousness still exists around imported inflation and rising energy prices.

EUR
As the Dollar weekend slightly towards the end of last week, the Euro seemed to be the main beneficiary. This, however, is expected to be short-lived. Russia’s continued threat hanging over gas prices is expected to weigh heavily on the single currency, with record electricity prices being faced across the Zone. Drought in Germany may lead to a decline in water levels on the Rhine. This is significant because around 30% of Germany’s natural gas, coal and iron ore are transported along this river and if levels fall too low this will affect the supply chain. The last time this happened was in 2018; it shaved 0.4-0.7% off GDP. Very little data for the Eurozone this week, with the currency expected to be driven by external trends.

USD
Stronger than expected payroll figures on Friday (more than double expectations) saw the Dollar not only strengthen but also increase the likelihood of further hikes in US interest rates in the coming months. This was coupled with the fact that unemployment fell to 3.5%, a near 50-year low, giving the Greenback a confidence boost. US treasury yields are up and there was a sell-off in short-dated bonds meaning the Dollar, while it is a touch weaker, continues to perform strongly relative to a week ago.

Aside from CPI numbers this Wednesday there is very little data coming out of the US. A potential issue to keep an eye on is a weakened outlook out of China, there have been reports of a surge in covid cases which could lead to further lockdowns which could affect the Dollar.