Published: 11/07/2022 By ECAPThe resignation of Boris Johnson was the spotlight in an otherwise data-light week, but sterling actually managed to rise on the news against all other European currencies and nearly keep up with the relentless dollar rally in spite of it. The avoidance of an ugly and potentially drawn out removal from office gave the pound a modest leg up, although uncertainty remains over the identity and timing of Johnson’s replacement. Regardless, we expect little to no major changes in policy, so the impact on the pound is likely to be minor. The June PMIs of business activity were revised higher, which provided a positive backdrop for the pound. Focus will be back on the economy this week, with May data out on construction, industrial production and the trade balance.
Yet another strong labour market report out of the US validates our view that a recession there is not in sight, jobs continue to be created at a much faster pace than the growth in the labour force, unemployment remains well below 4% and the number of job openings dwarfs that of job seekers. Markets are again pricing it a high likelihood of a 75 bp hike from the Fed at the July meeting. However, the key hurdle remains the inflation report this week. More important than the headline number, will be the more meaningful core index. There have been hints of stabilisation there in other reports, such as the PCE. A downward surprise could lead markets to revert back to pricing a 50bp hike and, given stretched positioning, cause a countertrend sell off in the greenback.