ACM Update 18-07-22

Written by: David Comber
Date posted: 18-07-22

As has often been the case recently, activity in the US dominated most of the economic headlines last week. Euro-Dollar has now fallen 8% in the last five weeks, finally breaking through the parity level, the first time this has happened since December 2002. In the UK, growth for May beat expectations and the battle to be the next PM continues.

Inflation remained the headline-grabber last week in the US, with June’s inflation numbers showing another 41-year high of 9.1%. This sparked fears that aggressive monetary policy action will be required from the Federal Reserve in their next meeting on 27th July. This was fuelled further by a full 1% interest rate hike from the Bank of Canada, their announcement coming only an hour and a half after the US inflation figure.

Against GBP, the Dollar briefly traded in the 1.17s on Thursday, before recovering back to over 1.19 to start this week. Movements last week can be seen in the chart below:

Federal Reserve member Christopher Waller came out in support of a 75-basis point rate hike at the next Fed meeting in 9 days’ time, but admitted he is more than open to a full 100-basis points, as seen in Canada. The above factors and the continuing global economic uncertainty proved enough to push EUR-USD through parity for most of Thursday afternoon before retracing. US retail sales for June came in at 1.0%, fractionally beating expectations.

For any clients looking to sell USD (or any currencies pegged to the Dollar such as the AED or Saudi Riyal), these are fantastic opportunities to buy Euros. As mentioned, the best since December 2002.

On the Euro side of the equation, the picture wasn’t the prettiest. In Germany, concerns around the Nordstream One gas pipeline functioning properly hit confidence in the economy, and thus weighed heavily on the Euro. Ursula von der Leyen travels to Azerbaijan today, seeking more natural gas for Europe and a move away from their dependence on Russian supplies.

Further south, Mario Draghi’s resignation offer was rejected by the Italian president. The coalition he leads began to fracture last week, leading to the possibility of a snap election and at the very least a government in political limbo.

Speaking of which… the Tory leadership contest continues to dominate (non-weather-related) headlines in the UK. We are now down to five (Rishi Sunak, Penny Mourdaunt, Liz Truss, Kemi Badenoch & Tom Tugendhat) in the running to replace Boris Johnson. The above list reflecting the order from the latest round of voting.

Economically, the UK performed better than expected for May, with 0.5% growth in GDP month on month. This pushed GBP-EUR on Wednesday morning to its highest level since 17th May, topping out at 1.19 before retracing as illustrated in the chart below:


Significant events for the week ahead:

Monday – Rightmove House Price Index

Tuesday – Reserve Bank of Australia Monetary Policy Minutes (02:30 UK time), UK Unemployment & Claimant Count (09:30), Eurozone CPI (10:00), Andrew Bailey speech @ Mansion House (18:45)

Wednesday – UK Inflation (07:00), Canadian Inflation (13:30)

Thursday – ECB Interest Rate Announcement (13:15) & Press Conference (13:45)

Friday – UK Retail Sales (07:00), France/Germany/UK/Eurozone/Canada Services & Manufacturing PMI Data (08:15 to 14:45)

This week is likely to be a busy one, as large data releases for the UK and the Eurozone will take centre stage. Tuesday morning starts early with the minutes from the last Reserve Bank of Australia meeting, where interest rates were raised by 0.5% earlier this month. Any suggestions of their future intentions on monetary policy will be watched for.

We also have a full raft of UK unemployment data on Tuesday morning. The overall unemployment rate is expected to remain stable at 3.8%, with average earnings at 6.7%. Eurozone Final CPI follows shortly after, expected to show 8.6%. Andrew Bailey speaks in the evening at the Mansion House Financial and Professional Services Dinner, where any subtle hints on upcoming monetary policy will be eagerly awaited.

For the UK, the inflation data release on Wednesday morning is the big one. Numbers continue to rise of late and a big figure may force the Monetary Policy Committee’s hand in their next meeting. Alternatively, falling short may show signs we have reached peak inflation, putting a pause on further rate hikes. Expectations are for 9.3%, versus last month’s 9.1%. The Bank of England still expect to see double-digit inflation at some point this year.

A long-awaited interest rate announcement from the European Central Bank arrives on Thursday. We expect to see at least a 25-basis point hike from this meeting, with the potential of 50-basis points. Either way, a rate hike would be the first from the ECB since July 2011, back when Jean-Claude Trichet was president.

UK retail sales complete the week on Friday morning, followed by a host of Services & Manufacturing data for Europe and North America.

So plenty going on, and some excellent opportunities for Dollar sellers at the moment. Whilst logic would dictate USD to continue strengthening at the moment in light of European-based uncertainty, that isn’t always the case. A bird in the hand…

Do reach out to the team if you have an upcoming requirement and we can develop an appropriate strategy.

Have a great week.