Published: 18/07/2022 By ECAPSolid economic data for May published last week in the UK, notably the May GDP print which came in at 0.5% against a 0.1% forecast figure. However the data did very little to help the pound, which fell against every G10 peer, except the Japanese yen. CPI data due out on Wednesday is likely to rise to yet another multi-decade record, which together with the hawkishness suggested by recent Bank of England speeches would validate markets expectation for a double-sized 50 bp hike in August. The labour market report this week will also tell us whether second round inflationary effects are becoming evident in the wage-setting process. The PMIs of business activity will bookend this extremely busy week, and consensus expects them to all remain safely within expansionary levels.
The European Central Bank (ECB) are due to hold their meeting on Thursday, the Nord stream one gas pipeline is scheduled to restart gas deliveries on the same day, which could make for some seriously volatile trading. Investors are concerned that the 10-day maintenance period could be delayed beyond this date. The market is set on a 25 bp hike on Thursday, which would open a window for the ECB to surprise markets and begin to restore its inflation-fighting credibility. But perhaps more important than the actual policy move will be the level of unanimity that is achieved around the anti-financial fragmentation toolkit, which is a euphemism for restarting the purchase of weak peripheral bonds using freshly printed euros. This promises to be one of the busiest trading weeks in many months for the common currency.
The hopes that inflation in the US has seen its peak, which were fanned by last month's PCE report, were dashed by another unpleasant surprise in the June CPI report. However, contrary to forecasts we think that hikes of more than 75 bps are unlikely, and markets have got ahead of themselves in pricing their likelihood, and the scorching dollar rally is becoming vulnerable to a correction in those expectations. This week, the dollar will cede the spotlight to other currencies, particularly the euro, as only second-tier data gets published. For once, the dollar should trade off of developments elsewhere.