In a week dominated by central bank speak, the disparity between Christine Lagarde’s ECB and Jerome Powell’s Federal Reserve was clear to see. While Fed members voiced their support for another 75bp hike at their July 27th meeting, Lagarde remains unwilling to open the door to any hike greater than 25bp at their meeting on July 21st. As a result, the Euro failed to keep pace with a resurgent Dollar, sliding down through 1.04 on Thursday and Friday, before finding support. The Euro fared better against the Pound, rising towards .8680 after a set of weak UK Manufacturing numbers on Friday morning, but it failed to hold that level for very long and returned to .8620 by the close. Looking ahead, Eurozone retail sales for June will be released on Wednesday. On Thursday we will hear from Philip Lane and on Friday it will be the turn of Christine Lagarde.
Eurozone PPI @ 10am
A bad week got worse for the Pound after Friday’s Manufacturing PMI’s came in below expectations. On its own this data release is not a game changer, but it continues the trend of softening UK data, raises recession fears, and supports the dovish tone of Andrew Bailey’s Sintra speech. UK rate hike expectations have moderated significantly over the last two weeks and the Pound has steadily weakened, particularly against the Dollar. EUR/GBP briefly climbed above .8670 on Friday while GBP/USD fell below 1.20, before finding support. Looking ahead, additional PMI data will be released tomorrow and on Wednesday Bank of England Chief Economist Huw Pill will speak at a conference in Qatar.
No data of note today
Despite the continued softening of US economic data, Federal Reserve policy setters continue to voice their support for another 75bp hike, and speak with confidence about engineering a soft economic landing. The Dollar responded by strengthening last week, pushing EUR/USD down towards 1.04 and GBP/USD towards 1.20. Today, American’s will enjoy their 4th of July holiday, but later in the week the labour report for June could bring volatility. Expectations are for an increase of 270,000 in the non-farm payroll head-count, and for the unemployment rate to remain unchanged at 3.6%.
The Euro fell against most of its peers after the ECB’s Sintra Forum panel discussion on Wednesday. President Christine Lagarde said it was highly likely that the ECB would be raising rates at their next two meetings but only confirmed the already expected 25bps which disappointed markets and prompted some Euro selling. EUR/USD looked set to retest its recent lows below 1.04 but the Euro later rallied after details of the ECB’s anti-fragmentation measures were revealed. EUR/GBP also fell but recovered back above 86p. Focus for the day ahead will be the preliminary estimate for euro area consumer price inflation in June.
Eurozone CPI @ 10am
Speaking on Wednesday, Bank of England Governor Andrew Bailey signalled that signs of an economic slowdown in the UK may limit the need for the central bank to ‘act forcefully’. Bailey also said that the UK would likely suffer more under the impact of high inflation than other countries. He didn’t however rule out raising rates by 50bps at the next meeting. Additionally, policymaker Swati Dhingra added to Bailey’s dovish tone in a separate speech signalling that there was room for a ‘gradual approach’ to tightening. The comments from both Bailey and Dhinga could keep pressure on the Pound and limit bets on future rate hikes from the BoE. GBP/USD fell more than 100 pips over the last two days but found some support around the 1.21 level.
Manufacturing PMI @ 9.30am
Federal Reserve Chair Jerome Powell said that there’s no guarantee the central bank can tame runaway inflation without hurting the job market. Speaking Wednesday at the ECB forum, Powell repeated his hope that the Fed can achieve a so-called soft landing and believes the US economy is well-positioned to withstand tighter monetary policy. Despite that, market focus is shifting from worries about inflation to concerns about a recession in the US. Core PCE inflation figures yesterday came in below expectations and may suggest that inflation has possibly peaked. The Dollar performed well this week, supported by safe haven flows and Powell’s hawkish commitment to bringing inflation down regardless of the pain it causes. EUR/USD broke below 1.04 yesterday but recovered back above it into the close.
Manufacturing PMI @ 2.45pm
The Euro firmed against the Dollar and Pound this week following comments from ECB Governing Council member Martins Kazaks. Kazaks said in June that the market shouldn’t get too carried away with the speed of re-pricing to much higher interest rate levels but this week added that a 50bps hike in July or September would be needed. EUR/GBP had traded to a two week high around 0.8650 while EUR/USD traded back above 1.06 briefly. Today is the last day of the ECB’s annual central banking forum in Sintra, Portugal and we’ll hear from President Lagarde. Markets will be keen to hear of how the ECB deals with the question of keeping a lid on Italian and Greek bond yields as interest rates rise. European yields and the Euro have taken a hit this morning following the earliest German regional CPI reading for June which printed softer than the expectations.
Lagarde speaks @ 4pm
The Pound fell back below 1.22 against the Dollar yesterday, undermined by the UK’s economic and political outlook, including the government’s plans to ditch the Northern Ireland protocol. On Monday, Boris Johnson pressed on with plans to pass legislation through parliament to overturn parts of the Brexit deal over Northern Ireland’s trade. But the bill still has to pass through the House of Lords, so any potential drag on the currency may be still yet to come. More UK public sector workers walked out of their posts yesterday, with criminal lawyers following rail workers in a dispute about pay rises. It’s been a quieter week on the data front in the UK this week but BoE Governor Andrew Bailey is participating in the ECB forum later which could inject some volatility.
Bailey speaks @ 2pm
Figures released in the US yesterday showed that consumer confidence fell to 98.7 in June from a downwardly revised figure of 103.2 in May, reaching its lowest level since February 2021, a worrisome sign for the economy. In addition, the expectations index, based on consumer’s short term outlook for income, business, and labour market conditions decreased sharply to 66.4 from 73.7, and is at its lowest level since March 2013 signalling slower growth for the second quarter and an increasing risk of recession by the end of the year. Despite this, EUR/USD came under pressure and bounced back below 1.05 briefly as recession fears fueled risk aversion and Wall Street indexes posted sharp losses, with yesterday being the worst day for US stocks in two weeks. Later today we’ll hear from Fed Chair Powell at the ECB’s annual policy forum in Sintra.
Powell speaks @ 2pm.
The sharpest move for the Euro last week came after the Purchasing Manager’s data release on Thursday morning. PMIs don’t always capture the markets attention, but they can be a good leading indicator of business activity and confidence, and this set of numbers did not make good reading. Euro yields fell dramatically, as did the Euro, down from 1.0580 to 1.05 against the Dollar in just a few minutes. Despite looking very fragile at that time, the Euro stabilised when the US data was revealed to be equally unimpressive. Since those PMI numbers EUR/GBP settled into a very narrow range between .8560 and .86. This week our focus will centre on the ECB’s Central Bank Forum which takes place in Sintra, Portugal. Dozens of central bankers from around the world will use this opportunity to talk, theorize and maybe try to solve the inflation / growth conundrum they currently face. The line-up includes Christine Lagarde, Jerome Powell and Andrew Bailey.
Lagarde speaks @ 6.30pm
The travails of Prime Minister Johnson continued last week. Rail staff are on intermittent strike and now teachers and postal workers are threatening to join them. His party was defeated in both the Devon and West Yorkshire by-elections, and in the aftermath his Party Chair, Oliver Dowden resigned. Despite all that, the Pound plotted a relatively steady course, trading between .8560 and .8640 against the Euro and 1.2160 and 1.2330 against the Dollar. One positive for the UK economy was the slight drop in annual core inflation from 6.2% to 5.9% which showed up in the data on Wednesday. This week we will hear from a number of Bank of England policy setters, including Jon Cunliffe tomorrow and Andrew Bailey on Wednesday
Soft data and growth concerns were a feature of last week and this was reflected in a media article sourced to the Federal Reserve which placed a 50% probability of US recession in next 12 months and a 66% probability over next 24 months. And the provisional PMI numbers for June released on Thursday will not have offered any comfort to Jerome Powell and his Fed colleagues who have made it clear their intentions to address inflation, but also to engineer a soft landing. We live in a world that is very sensitive to interest rates, so the task facing the Fed and other central banks right now is unenviable. In a relatively quiet week for the Dollar, it range traded between 1.0460 and 1.0610 against the Euro. This week is quiet on the data front, but we will hear from several Fed speakers, including Jerome Powell on Wednesday.
Durable goods orders @ 1.30pm
Rate hike expectations continue to be an important driver for FX markets and with Fed rhetoric moderating of late, and ECB members becoming more hawkish, the Euro has made good ground against the US Dollar. Having traded to a five year low of 1.0350 on May 13th, EUR/USD steadily climbed back above 1.07 last week. Against the Pound, the Euro plotted a steady course, range trading between .8430 and .8590, and closing out the week at .8500. This week a raft of new economic data will be released, including inflation numbers on Tuesday and the latest unemployment rate on Wednesday.
Despite the long awaited release of the Sue Gray report and a rough day in parliament for Prime Minister Johnson, the Pound had another positive week. While maintaining a narrow range against the Euro, Sterling appreciated against the Dollar, pushing up from below 1.25 to above 1.26. On Thursday, Chancellor Rishi Sunak unveiled a £21 billion package to support hard hit households through the rising cost of living. The measures, which will be partly funded by a temporary levy on oil and gas companies, include a £400 discount on energy bills for all and a £650 one-off payment to the poorest eight million households. In the week ahead we will see the release of UK Manufacturing PMI and Nationwide House price data on Wednesday.
Between the start of the year and mid-May the Dollar appreciated almost 10% on a trade-weighted basis, supported by a confident economic outlook, safe haven flows and rising expectations for interest rate hikes. But the last two weeks have marked a sharp reversal, and while the US economic fundamentals still look comparatively solid, expectations for rate hikes in the second half of the year have dampened somewhat and safe haven flows into the Dollar have eased up. Since May 12th
the Dollar has fallen 3% from its highs, bringing EUR/USD back above 1.0750 and GBP/USD above 1.26. On Friday we will see the US Labour Report for May which is expected to show a 325,000 increase in the non-farm payroll which should push the unemployment rate down to 3.5%, its lowest level since the first Covid lockdown.