Published: 20/07/2022 By ECAPSterling has benefitted from the broad dollar weakness this week, rallying back above the 1.20 level on the greenback. Yesterday’s UK labour report was slightly softer-than-expected, although in line with a jobs market still in prime position to weather the storm from higher price growth. Today’s UK inflation data will be the next big test for sterling. Should we see another surprise to the upside here, then markets may start pricing in a 50 basis point hike from the Bank of England at its August meeting as a near certainty, which would undoubtedly provide support for the pound today.
A number of the major media outlets were reporting on yesterday that ECB policymakers were considering whether or not to opt for a larger 50 basis point rate hike at its policy meeting this week, having said at the last meeting in June that the bank intends to raise rates by 25 basis points. This would be a pretty major turnaround for the typically cautious central bank, which has not raised interest rates at all since 2011. While a 50 basis point hike from the ECB this week is far from a done deal, markets are now assigning the scenario a two-in-three probability, having barely even considered the notion this time last week.
For now, however, most risk currencies are rebounding against the US dollar. Much of the rally in the greenback last week was fuelled by heightened bets that the Federal Reserve could raise interest rates by 100 basis points at their July meeting. This expectations have, however, faded (markets see less than one-in-five chance of a full percentage point move from the FOMC this month), which has triggered much of the retracement.