Published: 10/08/2022 By ECAPIn the UK, markets are fully focused on tomorrows Q2 GDP data. Markets are bracing for a bleak number, with economists pencilling in a 0.2% contraction, which would be the first since the first quarter of 2021. If anything, there is room for modest upside in the data, given the strength of the May GDP print, we would need to see a very sharp downturn in the June GDP number to tip the economy into a quarterly contraction - a 1.3% MoM downturn is expected, but this would be by far the largest contraction since the winter lockdowns were imposed early last year.
The reaction in FX to yesterday’s US inflation print was a rather aggressive one, ending a period of relative quiet in markets that has caused most of the major currency pairs to trade within very narrow ranges. While an easing in US inflation should alleviate concerns that the world’s largest economy could be set for a prolonged and painful recession, which would be a bullish signal for the dollar, it also clear implications for Federal Reserve policy.
The FOMC has already indicated that it would need to see clear signs of a slowdown in inflation before it stops the tightening cycle, but evidence that price pressures may have peaked could suggest enough to convince policymakers to return to smaller hikes. At the time of writing, markets are now pricing in not much more than a one-in-three chance of a 75 basis point rate increase at the Fed’s September meeting, down from almost 70% prior the the inflation number. This repricing can explain the move lower in the dollar, which sold-off by more than 1% on both the euro and the pound.