Markets fluctuated sharply in a volatile period last week. Equities sold off, but then regained most of the losses. Bond markets saw a sharp fall in yields. Currency markets have generally been less volatile but the US dollar is still close to its highest since April against sterling. Concerns about slowing economic growth are the main reasons for these moves. Rising Covid cases have left markets concerned over the state of the recovery, though recent corporate earnings data has been better than expected.
Meanwhile, concerns about rising inflation and earlier-than-expected tightening in monetary policy seem to have waned. A continued rise in inflation is likely to reignite those concerns, though recent Bank of England speakers suggested an early policy change was unlikely with dovish comments. The Bank of England will give its next policy update on 5th August. Last week, comments from Haskel & Deputy Governor Broadbent indicated that neither is ready to vote for a near-term change in policy.
Last week we saw consumer confidence rise further to -7 in July from -9 in June. Retail sales also rose by a further 0.5% in June. Meanwhile, Manufacturing PMI fell slightly as expected to and services PMI fell to 57.8. Both numbers still represent solid growth. This week, we only have the CBI retail survey and money supply figures.
GBPEUR – 1.1676
GBPUSD – 1.3760
Last week, we saw Eurozone manufacturing PMI moderate very slightly to 62.6 in July whilst services PMI continued to rise to 60.4. This week, we expect second quarter GDP to rise by 1.5%. This would be the first increase for three quarters. Other recent indicators suggest that this rebound has accelerated further in the early part of this quarter. Eurozone CPI headline July inflation is expected to be unchanged from June at 1.9%. The core rate is likely to have fallen further to 0.5%. This data is likely to echo the message coming from last week’s ECB update that monetary policy will remain highly accommodative.
EURUSD – 1.1784
EURGBP – 0.8565
One of this week’s key events is the policy update from the US Federal Reserve. The rise in inflationary pressures was still seen as probably a ‘transitory’ impact of the restarting of the economy as restrictions eased. Fed Chair Powell also said it might soon be time to start talking about tapering the Fed’s asset purchase programme. This meeting takes place amidst ongoing uncertainty. Inflation indicators have continued to go up, but rising Covid cases are raising concerns that the economy’s recovery may yet falter. As a result, Fed policymakers will probably not want to do anything new.
However, as annual CPI inflation recently hit a 30-year high the Fed are likely to acknowledge the potential for earlier rises. The key message is likely to be that they are in wait-and-see mode as they monitor developments. FedChair Powell will hold a press conference. He may use that to say that the Committee has now started to talk about when they should taper QE.
Second quarter GDP data are expected to post an annualised rise of around 9%. That would be the fourth consecutive quarterly increase. It would also mean that GDP is now more than 2% above its pre-pandemic level. The data won’t necessarily provide new insight into the momentum of the recovery into the second half of the year. The consumer spending update for June will show the trajectory of spending by the end of the quarter. We will also see the Fed’s preferred inflation measure which is expected at its highest annual reading for around 30 years at 4.1%.
GBPUSD – 1.3760
EURUSD – 1.1784
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*Interbank rates correct at 7 am on the date of publishing.
