Politics and Inflation Set to Dominate the Markets Once More
Politics and Inflation Set to Dominate the Markets Once More
Last week was dominated by US inflation and, closer to home, politics. The Consumer Price Index in the US hit a new 40-year high of 9.1% which sent shivers through the markets and looks set to dominate sentiment for the week ahead. Expectations have risen that the Federal Reserve will raise rates by 100 bps at the next meeting, with markets now indicating at least an 80% chance of this happening. This would be the largest rise since 1981, with the pressure mounting on the Fed after the Bank of Canada surprised markets with a 100 bps last Wednesday. Unsurprisingly the dollar continued to shine, and with another hike of 75bps expected in September, it looks set fair. In sharp contrast to the dollar, both the euro and sterling remained under pressure. The euro traded below parity against the greenback for the first time in twenty years, which will no doubt focus the mindset of the ECB when it meets this coming Thursday.
Politics also came to the fore primarily in the UK and Italy, which has its own trials and tribulations. Whether Mario Draghi stays as Prime Minister is an open question as I write. The race to be the next leader of the Conservative Party and, as such, Prime Minister still looks relatively open, with Rishi Sunak and Liz Truss the current favourites. In the week ahead, the candidates will continue to strut their stuff in the beauty parade as they try and convince not only their fellow MPs of their abilities but also the members of the Conservative party, who, in the end, have the final say. The week ahead sees a full health check of the UK economy with Retail Sales, Employment and Inflation data all released. Elsewhere the European Central Bank meets, and Purchasing Managers Indexes are also released.
GBP
Whilst the chattering classes continue to be fascinated by the battle to be the next leader of the country, traders will be focused on the data released by the Office for National Statistics during the week. With sterling touching its lowest levels since the depths of the pandemic, whether the data can haul sterling back off its low levels against the dollar is open to debate. Much of sterling’s travails are down to the strength of the dollar, and it continues to mark time against the euro. First out of the blocks this week is the Employment data for May, which is released tomorrow morning. The labour market data is followed by a complete set of inflation data on Wednesday, which will probably increase the pressure on the Bank of England to hike rates by 50bps at their next meeting on 4th August- whether they actually do after their wishy-washy performances of late is undoubtedly open to debate. Finally, on Friday, Retail Sales for the UK are released, which are expected to have drifted lower.
EUR
With the euro trading below parity against the dollar, all eyes will be on the European Central Bank on Thursday lunchtime to see their reactions. Having already warned the markets of a 25bps rise, this is now the least that the least expected, but the hawks on the council will without doubt push for 50bps to counteract the weak level of the euro, which is in itself importing inflation. The ECB also faces the fallout from the current political crisis in Italy, potentially exacerbating the tensions between countries as yields diverge and, as such, pressurising the ECB to reveal details of their antifragmentation tool. There is an outside chance that the ECB moves by 50 bps which may give the beleaguered single currency a fillip. With almost perfect timing, the June inflation figures for the eurozone are published on Tuesday, making for a lively schedule on Thursday morning. Consumer Confidence is posted on Wednesday, and on Friday, S&P will publish their Purchasing Manager’s
Indexes for the zone. Will the euro recover by the end of the week is the question which only the markets know the answer to?
USD
Whilst the macro-economic data focus is firmly on this side of the Atlantic this week; there is little doubt that the US economy and the mighty dollar will continue to dominate the thoughts and actions of traders. Buy dollars and wear diamonds, an old market saying has undoubtedly been true, especially since the release of the CPI number last Wednesday. The dollar Index has soared, and sterling and the euro have suffered. Although the attention is on this side of the pond, the markets will be paying attention to the words of wisdom from President Biden as he visits Saudi Arabia and tries to wrestle the release of more Oil. Data wise it is a tranquil week with only Housing information released tomorrow, the weekly jobless total on Thursday and then, in common with the rest of the world, S&Ps Purchasing Managers Indices on Friday.
20220718
