UK: Weekly FX Market Update 24 July

GBP

• Softer than expected UK CPI last week caused interest rate expectations to sharply decline from 6.25% to 5.8%.

• GBPUSD responded to the CPI print by falling 1.5%.

• UK Consumer confidence experienced its largest drop since April 2022, further weakening the pound.

• The week to come has few UK data releases but could still see sterling volatility as the Fed, ECB and BoJ set interest rates.

• Then it’s the turn of the Bank of England to set rates on August 3rd. Will they raise by 0.5% or take the latest CPI into account and raise by 0.25%? Or could they pause altogether as per the Fed in June?

EUR

• Eurozone CPI stayed steady at 5.5% last week with the Euro unmoved by the news.

• ECB’s Knot spoke about hiking interest rates beyond July as ‘at most a possibility, but by no means a certainty’, demonstrating the balanced outlook for the single currency.

• Bloomberg gives a 90% probability of a July hike, and a 64% chance of a September rate hike with a terminal rate at 3.87% .

• Will ECB President Lagarde hike rates in July and continue her hawkish mantra to cut inflation? Or are we nearing the end of the ECB hiking cycle?

USD

• The dollar regained some ground against its peers last week, with GBPUSD falling 2 cents on the week as UK inflation surprised to the downside.

• The Bank of Japan also helped US Dollar bulls. BoJ officials saw little urgent need to address the side effects of its yield curve control and helped USDPY jump 2% in 2 hours.

• Bloomberg gives a 96% chance of the Federal reserve hiking rates by 0.25% this Wednesday. The Fed has stated that they will raise rates twice before year end. But we ask, is the market bothered if its one or two hikes? With rates at 5.25% and inflation at 3% are investors thinking that the Fed will end its rate hike cycle soon and will we see more USD weakness anyway?

• The week ends with the release of US Personal Consumption Expenditure. Will that confirm more inflation slowdown?

Main events for this week:

Mon Jul 24

09:00 EUR Manufacturing and Services PMI

09:30 GBP Manufacturing and Services PMI

14:45 USD Manufacturing and Services PMI

Tue Jul 25

09:00 EUR German IFO Business Climate

15:00 USD Consumer Confidence

Wed Jul 26

02:30 AUD CPI

19:00 USD FOMC Statement/Fed Funds Rate

19:30 USD FOMC Press Conference

Thu Jul 27

13:15 EUR ECB Interest Rate Decision/Monetary Policy Statement

13:30 USD Advance GDP/Durable Goods/Goods Trade Balance

13:45 EUR ECB Press Conference

Fri Jul 28

00:30 JPY Tokyo CPI

05:00 JPY Interest Rate Decision/Monetary Policy Statement

05:30 JPY BoJ Press Conference

13:30 CAD GDP

13:30 USD Core Personal Consumption Expenditure Index

15:00 USD University of Michigan Consumer Sentiment/Inflation Expectations