Published: 05/07/2022 By ECAPRisk off trading dominated action in markets in the second half of last week, as a deterioration in macroeconomic data and high inflation prints almost everywhere heightened concerns over the possibility of recessions later in the year. Slowdowns fears are now arguably the main driver of currencies globally, perhaps even more so than central bank interest rate expectations, which have somewhat taken a backseat in the past few days. The pound in the past few days, which has languished around the 1.20-1.21 level against the broadly stronger US dollar. With UK inflation potentially set to peak later and higher than many of its peers, sterling has proved particularly sensitive to recession concerns. There will be no major economic data releases in the UK this week in order to support this view, although we will get a handful of Bank of England member speeches, including members Cunliffe, Tenreyro, Pill and Mann. Any indication that policymakers are erring towards raising rates by 50 basis points at the next MPC meeting in August would be positive for the pound and may trigger a recovery rally from currently suppressed levels.
Among the major currencies, the euro appears to have found a temporary floor around the 1.04 level, which has provided a pretty strong resistance level for EURUSD in the past few weeks. While the ongoing energy crisis in Europe and signs of a deterioration in economic data, notably out of Germany, provide reason for pessimism, we would argue that recent hawkish comments from European Central Bank members have not yet been fully reflected in the common currency. A handful of members appear to be coming around to the possibility of a 50 basis point rate hike at the July Governing Council meeting. Whether this will be an opinion shared by the majority of the council by the time of the meeting remains to be seen, although strong PMI (Tuesday) and retail sales data (Wednesday) would certainly raise the possibility of such a hawkish shift.