Price hikes and recession dominates

World Markets

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.

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.

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.