UK: Weekly FX Market Update 31 July

GBP

• GBPUSD held its ground last week, even as the Fed hiked interest rates to a 22 year high.

• GBPEUR managed to gain nearly 1%, despite the ECB hiking rates by 0.25%.

• The main data point is the Bank of England rate decision on Thursday.

• Construction PMI and MPC member Pill round the week off on Friday.

On Thursday, the Bank of England is expected to hike interest rates by 0.25%, with the raise 99% priced in, suggesting that this alone may not impact the pound. However, notwithstanding a surprise of rates being kept on hold, or a hike of 0.5%, what could move the market is the expectation of what the BoE signals it could do next.

Will there be a nod to the most recent inflation data that suggests the corner has been turned and the end of the hiking cycle? Is the fear of stagflation growing and impacting decision making? Is there a concern around the housing market and the leap in monthly payments as ‘old’ fixed term mortgages come to an end as current rates hit a 15 year high?

The BoE’s take on the outlook of the UK economy could be the real market mover.

EUR

• The European Central Bank followed the Fed last week by hiking rates by 0.25%, then stated that they would be ‘data dependent’ for their next move.

• The euro had been under pressure after very weak PMI releases on Monday.

• Good news came in the form of German data on Friday, which showed Germany is out of recession.

• Though its economy was stagnant in Q2, rather than expanding.

• ECB Kazimir said that even if the ECB paused hiking rates in September, this wouldn’t mean that there wouldn’t be any hikes after that. ‘Our mission is still not fulfilled’ was Kazimir’s comment on inflation.

• Could the ECB pause in September and then hike rates in November?

USD

• Fed Chair Powell delivered a 0.25% rate hike and then explained that they could hike or hold in September.

• Morgan Stanley economist Zentner thinks the Fed has finished its rate hike cycle. She said that nothing had led them to ‘doubt our view that this will be the last hike of the cycle.’

• The US dollar was soft after the hike but roared back as Advance GDP was again strong last month, growing by 2.4%.

• June Core PCE came in at 4.1%, below the estimated 4.2%, making a soft landing for the US economy more possible.

• September 20th is the next Federal Reserve meeting. Can the US economy continue to perform and help the US dollar strengthen before then?

Main events for this week:

Mon Jul 31

10:00 EUR CPI Flash Estimate

Tue Aug 1

05:30 AUD Cash rate and Statement

15:00 USD ISM Manufacturing PMI

Wed Aug 2

No Top Tier Data

Thu Aug 3

09:00 EUR Final Services PMI

09:30 GBP Final Services PMI

12:00 GBP Bank of England (BoE) Interest Rate Decision/Monetary Policy Summary

12:30 GBP BoE Governor Bailey Speaks

15:00 USD ISM Services PMI

Fri Aug 4

09:30 GBP Construction PMI

10:00 EUR Retail Sales

12:15 GBP MPC Pill Speaks

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

13:30 CAD Employment Data