Good morning,
This week, the UK inflation data delivered a collective sigh of relief to the Bank of England’s nine policymakers. The CPI inflation rate stayed comfortably at 2%, right on target. Even core and services inflation held steady, dispelling any panic. However, the Bank had hoped for a slight drop in services inflation, but it stubbornly remained at 5.7%. Despite whispers of a “Taylor Swift effect” bumping up hotel prices, concert-related inflation actually dipped. Consequently, the probability of an August rate cut slipped from 50% to 48%. So, while a rate cut remains likely, it’s now a tad less so.
Last Week
Since Keir Starmer’s Labour Party swept to power in early July, Sterling has been riding high. Last week, however, some of that shine dulled as Friday’s retail sales sent the pound lower across the board. Midweek, GBP flirted with two-year and one-year highs against the euro and dollar, respectively, buoyed by a hotter-than-expected inflation report. The Financial Times attributed this to Taylor Swift’s UK tour, which pressured prices in the leisure sector. Investors now seem poised to sell the pound and with an August rate cut priced at 50/50, should the Bank of England act, expect Sterling to dip further.
Fresh from his miraculous escape from an assassin’s bullet, Donald Trump was back to his bombastic self as he accepted the Republican nomination at the party convention in Milwaukee. Trump confirmed Ohio Senator JD Vance, a strong isolationist, as his running mate. Both promptly called out China for “eating the American workers’ lunch” and questioned support for Ukraine and Taiwan, triggering steep losses in the Taiwanese, Hong Kong, and Nasdaq indices. The latter posted its biggest drop in over a year due to its exposure to Taiwan’s semiconductor industry. The dollar strengthened as risk appetite faded, while Bitcoin surged as a proxy for a potential Trump victory. Meanwhile, Biden contracted COVID-19 and yesterday stepped down and endorsed Kamala Harris.
While the world has been engrossed in US election mania, the Bank of Japan has quietly been deploying tranches of its foreign exchange reserves to prop up the struggling yen. JPY ended the week up 4%, as the BOJ’s interventions seem to be lifting the currency from 40-year lows. With some commentators now viewing Fed rate cuts in September as a 50/50 chance, and the BOJ emboldened to protect the yen and potentially raising rates for the second time this year, the yen’s run looks set to extend. This shift marks a significant turnaround, reflecting the BOJ’s commitment to stabilising its currency.
This Week
This Wednesday, all eyes will be on the Eurozone and UK flash PMIs, which could significantly influence the policy paths of the ECB and BoE. The ECB recently held rates steady, with President Lagarde hinting that a September rate cut is still on the table, maintaining a 65% probability of such a move. If July’s PMIs reflect the same softness as June, expectations for a rate cut could rise, pressuring the euro. In the UK, BoE rate cut odds for August dropped to 45% from 60% after Chief Economist Huw Pill highlighted persistent services inflation and wage growth. Strong PMI data could further reduce these odds, potentially boosting the pound, especially against a weaker euro.
With investors ramping up their Fed rate cut bets, the US dollar faced pressure last week, though it regained some ground by the latter stages. Softer-than-expected CPI data bolstered Fed officials’ confidence that price pressures are sustainably low, with Chair Powell indicating they might cut rates before inflation hits 2%. Combined with a weaker June employment report, these developments led markets to price in a September rate cut and see a 50% chance of a third reduction this year. These bets will be tested next Thursday with the first estimate of US GDP and on Friday with the core PCE index, personal income, and spending data.
Key events
Wednesday July 24th
08:15 French PMIs
08:30 German PMIs
09:30 UK PMIs
14:45 Canadian Rate Statement & US PMIs
15:30 Bank of Canada Press Conference
Thursday July 25th
13:30 US Advance GDP & Unemployment Claims
Friday July 26th
13:30 Core US PCE Inflation
Have a great week,
The Garton team.