UK: Weekly FX Market Update 3 July

GBP

• Last week, GBPUSD started to decline when Bank of England Governor Bailey repeated that inflation would be controlled by higher interest rates.

• The UK economy is growing very slowly, so more interest rate hikes could push it into a recession later this year.

• However, with the Eurozone in recession already, GBPEUR managed to push higher.

• This week, the ‘forward looking’ Purchasing Managers Index data is released. Will this confirm the weak picture for the UK economy?

• Bank of England MPC Committee member Mann speaks on Friday, and with a lack of UK economic releases for direction, US and Eurozone data could push the pound around.

The weakening of the pound based on persistent inflation and interest rate hikes is a potential pivot moment, after all, it’s the same story and data that has supported the pound since the UK political crisis in September 2022. GBPUSD has rallied up to 25 cents higher since the low of 1.0350. To what extent could we see a retracement if the market punishes the pound going forward for further rate hikes?

EUR

• The euro slipped 0.75% against the US dollar last week, driven lower by positive US GDP data.

• We also saw a surprising Spanish CPI release, with inflation at 1.6%, lower than had been expected and below the 2% inflationary target that the ECB is working towards for the Eurozone.

• The significant date release of the week is on Thursday, Eurozone Retail sales data, and Madame Lagarde rounds the week off on Friday.

ECB President Lagarde continues to repeat that Eurozone rates will be raised in July, however, Bloomberg suggests Eurozone interest rates will peak at 3.87%, which would mean that the July hike would be the last one of this cycle. With this in mind, if the ECB do decide to hike in September and beyond, are we in for a bout of euro strength?

USD

• US GDP showed continuing economic strength, growing 2% annually and better than the 1.4% expected – a shot in the arm for the dollar.

• The positive data continued, with the US consumer looking forward to the future as well. The confidence index was released at 109.7, nicely above the 104.0 expected.

• FOMC meeting minutes are released on Wednesday evening. Will they confirm that committee members are as hawkish as Fed Chair Powell, or will there be dissent?

• The week is rounded off by the release of Non-Farm Payrolls on Friday. Will the US dollar continue its recent strength or take a breather?

Events for the week ahead:

Mon Jul 3

All Day CAD holiday

07:30 CHF CPI

09:00 EUR Final Manufacturing PMI

09:30 GBP Final Manufacturing PMI

15:00 USD ISM Manufacturing PMI

Tue Jul 4

All Day US Holiday

05:30 AUD Cash Rate/Reserve Bank Australia Rate Statement

Wed Jul 5

02:45 CNY Caixin Services PMI

09:00 EUR Final Services PMI

09:30 GBP Final Services PMI

19:00 USD FOMC Meeting Minutes

Thu Jul 6

02:30 AUD Trade Balance

09:30 GBP Construction PMI

10:00 EUR Retail Sales

13:30 USD Unemployment Claims/Trade Balance

15:00 USD ISM Services PMI

Fri Jul 7

07:00 EUR German Industrial Production

13:30 CAD Unemployment Rate

13:30 USD Non-Farm Payrolls/Average Hourly Earnings/Unemployment Rate

15:30 GBP MPC Mann Speaks

17:45 EUR ECB President Lagarde Speaks